It was a week where oil prices rose modestly, while natural gas futures climbed higher to gain an impressive 41% in November.
On the news front, integrated energy biggie Royal Dutch Shell RDS.A became the first oil company to link executive pay with carbon emission targets, while Par Pacific Holdings, Inc. PARR agreed to acquire privately-held U.S. Oil & Refining Company to bolster its downstream operations.
Overall, it was a good week for the sector. West Texas Intermediate (WTI) crude futures edged up 1% to close at $50.93 per barrel, while natural gas prices rose some 5.9% to $4.612 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: BP, Chevron Starts Production from Megaprojects)
The U.S. crude benchmark clawed back after several weeks of weakness, reflecting optimism surrounding an expected production cut at OPEC’s December meeting. However, this could not stop the commodity’s biggest monthly decline in more than 10 years as the specter of abundant global supply swamping demand scared off investors. As a matter of fact, black gold dropped around 22% in November.
Meanwhile, natural gas prices continued to gain as inventories remain significantly below their five-year average amid predictions of strong demand with forecasts of colder-than-normal weather.
Recap of the Week’s Most Important Stories
1. Royal Dutch Shell announced its decision to link remunerations of its executives with targets for carbon reduction initiatives. This step of fixing high-level employees’ compensations is the first time by any energy company to combat climate change.
The decline in Shell’s carbon emissions is expected to be satisfied by several short-term targets, awaiting votes from shareholders in the 2020 annual general meeting. Notably, the energy major will likely commence implementing targets every year for shorter periods — three to five years — from 2020 through 2050.
Investors, including Church of England Pensions Board and asset management firm Robeco, have been pressing the energy major to take such strong initiatives and save the earth from climate change.
2. In a bid to bolster scale and diversify properties, Par Pacific Holdings recently inked a deal to acquire privately-held downstream company, U.S. Oil & Refining Company. The transaction is valued at $358 million, plus net working capital. Houston-based Par Pacific is likely to finance the deal via $225-million secured term loan and $150 million of equity financing. Subject to satisfactory closing conditions and regulatory approvals, the deal is set for closure next January.
Par Pacific — whose operations are concentrated in Hawaii, Pacific Northwest and Rocky Mountains — is set to expand its mainland foothold by acquiring Tacoma, Washington-based U.S. Oil & Refining. The deal will bolster Zacks Rank #3 (Hold) Par Pacific’s refinery capacity to create a diversified integrated downstream network. Notably, it possesses a 94,000-barrel per day (bpd) refinery and 91 retail outlets across Hawaii. The company also owns and operates a refinery in Wyoming, having a processing capacity of 18,000 bpd, as well as 33 retail outlets in the Rockies and Pacific Northwest.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The assets to be acquired by Par Pacific comprise a refinery with a processing capacity of 42,000 barrels per day, along with 2.9 million barrels of refined-product and crude-oil storage. The acquisition also incorporates a marine and fuel terminal, as well as unit train-capable rail-loading terminal. The refineries and logistic facilities serve the Pacific Northeast market. (Read more Par Pacific to Buy U.S. Oil & Refining for $358M)
3. The bidding war for Trinidad Drilling Limited finally comes to an end, with Ensign Energy Services beating Precision Drilling Corporation PDS to acquire 56% of Trinidad’s shares. In a bid to cement their market position, two of Canada’s largest drillers — Precision and Ensign — had been competing to acquire their smaller rival Trinidad for quite some time.
Notably, Trinidad had started a comprehensive strategic review process early this year, in a bid to contemplate on different strategies to enhance its shareholders’ value. Post the strategic review process, Canada’s second-largest driller Ensign went hostile with C$947 (C$470 million in cash and C$477 as assumption of debt) million bid for Trinidad in August 2018.
However, on Oct 4, Precision announced a stock and debt deal worth C$1.03 billion ($550 million in stock and $477 million as debt assumption) to acquire Trinidad. Consequently, Trinidad rejected Ensign’s hostile take-overbid and accepted Precision’s proposal, which represented 25% premium over Ensign’s offer. (Read more Precision Loses Bidding War, Ensign to Buy Trinidad)
4. In a bid to improve leverage metrics, Petrobras PBR recently entered into two separate deals to divest its stakes in 37 oilfields for a total consideration of $823.1 million.
Per the first agreement, the Brazilian oil giant will jettison its stakes in 34 onshore fields to Brazil-based energy company, 3R Petroleum, for $453.1 million. The fields are located in the Potiguar Basin and have a production capacity of around 6,000 barrels of oil per day (bpd). Notably, $34 million will be paid on signing of the deal (which is due on Dec 7) and the remainder will be paid upon closure.
Per the second agreement, the state-controlled company will offload stakes in three shallow water fields, located off the coast of Rio de Janeiro, to European company Perenco. These fields have a production capacity of 9,000 bpd. The total value of the transaction is $370 million, of which, Petrobras has already received $74 million upon the signing, while the remainder will be paid on culmination of the deal. (Read more Petrobras to Vend 37 Oilfields for $823M to Trim Debt)
5. Ecopetrol S.A. EC released financial and operational plan for 2019. For 2019, the company projects investments between $3.5 and $4 billion, up 16-33% from the estimated figure in 2018. The Colombian state-run oil firm increased spending on exploration and production projects.
Of the total investments, more than 80% will be allocated to upstream operations. Of the amount, 90% of the investments will be made in Columbia. About 8% is expected to be spent in establishing the company in prospective basins in the United States, Mexico and Brazil. In 2019, exploration capex is expected to increase to more than $460 million from about $250 million in 2018.
Ecopetrol also stated that it intends to make investments between $3 billion to $3.5 billion in 2018, even though it had just spent $1.79 billion through the third quarter. For 2019, the company projects production to grow in the range of 720,000-730,000 barrels of oil equivalent per day, above the previous projection of 715,000-725,000 barrels per day projected for 2018. The addition of proven reserves is likely to be equivalent to 100% of oil and gas production. (Read more Ecopetrol Projects Higher Investment on Projects in 2019)
The following table shows the price movement of some the major oil and gas players over the past week and during the last 6 months.
Last 6 Months
The Energy Select Sector SPDR – a popular way to track energy companies – generated a +3.4% return last week. The best performer was downstream operator Marathon Petroleum Corp. MPC whose stock jumped 5.6%.
Longer-term, over six months, the sector tracker is down 12.7%. Oil refiner and marketer Valero Energy Corp. VLO was the major loser during this period, experiencing a 35.8% price decline.
What’s Next in the Energy World?
In this week, market participants will be closely tracking the regular releases i.e. the U.S. government statistics on oil and natural gas -- one of the few solid indicators that comes out regularly. Energy traders will also be focusing on the Baker Hughes data on rig count, while outcome from the OPEC meeting in Vienna on Thursday and Friday will be of major interest.
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Petroleo Brasileiro S.A.- Petrobras (PBR) : Free Stock Analysis Report
Valero Energy Corporation (VLO) : Free Stock Analysis Report
Par Pacific Holdings, Inc. (PARR) : Free Stock Analysis Report
Marathon Petroleum Corporation (MPC) : Free Stock Analysis Report
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