Oil & Gas Stock Roundup: CVX Shelves Project, DVN Goes Shopping - Analyst Blog

By Zacks Equity Research,

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Crude prices climbed, Chevron Corp. ( CVX ) put its $10 billion North Sea development on the back burner and Devon Energy Corp. ( DVN ) announced a $6 billion acquisition.

Crude Oil:

Crude prices increased last week on encouraging U.S. economic reports that fuelled hopes for robust demand in the worlds biggest oil consumer.

In particular, U.S. manufacturing activity rebounded in Nov by hitting an eight-month high of 54.3, up from the 51.8 registered last month. Oil traders often refer to manufacturing statistics as yardsticks to gauge the future fuel demand growth.

Coming to jobless numbers, the U.S. Department of Labor reported that initial claims decreased 21,000 to 323,000 in the week ending on November 16, from previous week's figure of 344,000. This was considerably below the consensus estimate of 335,000.

However, sentiments were somewhat dampened by the Energy Information Administration (EIA) report that showed another big jump in inventories, which remains well above the upper limit of the average for this time of the year.

As per the EIA's weekly 'Petroleum Status Report,' crude inventories climbed by an unexpected 375,000 barrels for the week ending Nov 15 to 388.46 million barrels. What's more, storage at the Cushing terminal in Oklahoma, the key delivery hub for U.S. crude futures traded on the New York Mercantile Exchange, was also up 1.74 million barrels, the sixth straight weekly gain.  

Wednesday's release of Fed minutes - which suggested that a steady improvement in economic conditions may prompt the central bank to taper its $85 billion bond repurchase plan in coming months - also held back crude prices. Traders have voiced concerns that Fed's shift away from the bond buying policy may lead to dollar-denominated oil prices to increase in local-currency terms in emerging markets, thus slowing growth.

As a result of these factors, by close of trade on Friday, West Texas Intermediate (WTI) oil settled at $94.84 per barrel, gaining 1.1% for the week. 

The Sub-Sectors:

Integrated: Major integrated players were mixed, with the most prolific gainer being Chevron Corp. The San Ramon, CA-headquartered energy behemoth added 3.3% to its share price last week, as it postponed oil development from the Rosebank project in the U.K. North Sea, owing to doubts over the economic viability of the $10 billion initiative.

The temporary abandoning of the high-profile project further confirms shareholder pressure on the oil majors, who have struggled lately with poor returns and expensive capital projects.       

In another development, world's largest publicly traded oil firm Exxon Mobil Corp. ( XOM ) has agreed to divest its 60% stake in the Hong Kong power business for $3.4 billion to existing partners CLP Holdings and state-owned China Southern Grid (CSG). The sale is an attempt by Exxon to raise funds and direct the amount into its core operations.

As mentioned above, several integrated global companies are eager to control spending and enhance value for its investors through asset sales, share buybacks or dividends in view of lagging share prices.

E&P: Last week, the SIG Oil Exploration & Production Index traded up 2.2%.

Top gainers include Devon Energy Corp., which was up 3.5% through the week after agreeing to buy Texas-based oil and gas explorer GeoSouthern Energy for about $6 billion in cash. The market reacted positively to the news, as the deal will enhance Devon's footprint in the Eagle Ford Shale. The acquired assets bring with it an output of 53,000 barrels of oil equivalent (BOE) per day and 82,000 net acres with at least 1,200 undrilled locations.

In addition, reserves are estimated at 400 million barrels of oil equivalent, the majority of which is proved reserves. Most importantly, production from the properties are expected to grow at a compound annual growth rate of 25% for the next few years, reaching a peak production rate of 140,000 BOE per day, a whopping increase of 164.1% from the current output level.      

Among other developments, U.S. energy firm ConocoPhillips ( COP ) announced first gas production from the Jasmine field in the United Kingdom, Central North Sea. The Houston, TX-based energy explorer, which holds an operated interest of 36.5% in the development, sees Jasmine as an important growth project that will contribute significantly to its 3-5% production increase through 2017. The field is on course to churn out 40,000 barrels of oil equivalent per day in 2014.    

Oilfield Services: The oil services group - represented by the Philadelphia Oil Services Sector Index - was down 2.4% through the week.

Transocean Ltd. ( RIG ) lost 4.3% through the week after the offshore drilling giant informed that its deepwater rigs would make up a third of the total number of fleet that will be available for work in 2014. The unusually high number of out-of-contract rigs confirms the concerns about the near-term softness for deepwater drilling work.     

Last week also saw oilfield services behemoth Schlumberger Ltd. ( SLB ) getting a corporate credit ratings upgrade from Standard & Poor's. The one notch improvement - to AA- from A+ - was based on Schlumberger's leading product portfolio, specialty service capabilities, proprietary technological expertise and strong relationships with    large oil companies.

Refining & Marketing: Almost all major downstream stocks traded in the black, with the top gainers being Tesoro Corp. ( TSO ), which advanced 5.3% over the week.

After going through a bumpy ride for much of 2013, the sector has started to look up in recent weeks - and it's mainly to do with the 'oil spread', the difference between the WTI price and its global counterpart, Brent. With refiners being buyers of WTI, while selling their products based on Brent, the wider the so-called 'Brent-WTI spread', the better it is for the sector components.

During the last few weeks, WTI and Brent have been heading in opposite directions. In fact, the WTI price has receded to the sub-$95 per barrel level but Brent has stayed strong, at around $110 per barrel. This has widened the oil spread to more than $15 per barrel, thereby boosting refinery stocks.

Tesoro was the only major newsmaker last week, as the company sold a cluster of its southern California midstream assets - including two marine terminals and a pipeline system - to affiliate Tesoro Logistics L.P. for $650 million. The deal is part of the 'drop-down' transactions (or asset buys from the partnership's sponsor company) between Tesoro and Tesoro Logistics - spun off by the former in 2011. 

Natural Gas:

Investors continue to focus on temperature patterns to understand the fuel's economic dynamics. As it is, natural gas fundamentals look uninspiring with supplies remaining ample in the face of underwhelming demand. In fact, it is expected to take many years for the commodity's demand to match supply in the face of newer projects.

Despite these issues, natural gas rallied last week on the back of a larger-than-expected decrease in natural gas supplies and forecasts of cold weather conditions.

The EIA's weekly inventory release showed that natural gas stockpiles held in underground storage in the lower 48 states fell by 45 billion cubic feet (Bcf) for the week ended Nov 15, higher than the guided range (of 36-40 Bcf drawdown). Importantly, the decrease - the first withdrawal of the season - was more than both last year's build of 36 Bcf and the 5-year (2008-2012) average addition of 2 Bcf for the reported week. Chilly weather forecasts - in the Eastern U.S. over the next ten days or so - are likely to further spur the commodity's demand for heating.

Influenced by these factors, natural gas spot prices ended Friday at $3.77 per million Btu (MMBtu), up 5.9% over the week.

Performance Chart of Some Major Companies:

The following table shows the price movement of the major oil and gas players over the past week and during the last 6 months.


Last Week's Performance

6 month performance

























This Week's Outlook:

Apart from the usual suspects - the U.S. government data on oil and natural gas - market participants will be closely tracking a bunch of data associated with durable goods orders, consumer confidence and housing. The reports will shed further light on the economy's wellness and the need for the bond buying policy.

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CONOCOPHILLIPS (COP): Free Stock Analysis Report

CHEVRON CORP (CVX): Free Stock Analysis Report

DEVON ENERGY (DVN): Free Stock Analysis Report

TRANSOCEAN LTD (RIG): Free Stock Analysis Report

SCHLUMBERGER LT (SLB): Free Stock Analysis Report

TESORO CORP (TSO): Free Stock Analysis Report

EXXON MOBIL CRP (XOM): Free Stock Analysis Report

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Stocks: BOE , COP , CSG , EIA , WTI

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