Heading into the New Year, both oil and natural gas futures surged to multi-month highs after gaining handsomely in 2016.
On the news front, British energy giant BP plcBP agreed to buy a chain of petrol stations from Australian retailer Woolworths Ltd., while supermajor ExxonMobil Corp.XOM declared a new natural gas discovery in Papua New Guinea.
Overall, the sector ended 2016 on a bullish note. West Texas Intermediate (WTI) crude futures added around 3% for the week to close at $53.72 per barrel, while natural gas prices jumped 6.2% to $3.724 per million Btu (MMBtu). (See the last 'Oil & Gas Stock Roundup' here: Chevron's Asset Sale, Petrobras' TOTAL Deal and More .)
Posting its biggest annual gain since 2009, oil prices closed 2016 up 45%. The bullish momentum continued during last week's trading, with the commodity attaining its highest closing in 17 months as investors and analysts grow more confidant that producers will adhere to their agreed output cut quotas, which will reduce the global inventory glut next year.
Oils-Energy Sector 5YR % Return
Meanwhile, natural gas was 2016's best-performing commodity, gaining 60% during the period. The heating fuel surged to a 2-year high last week following a massive withdrawal that sent storage into a deficit versus the five-year average. The commodity was further buoyed by predictions of abnormally frigid weather over the entire U.S that is set to translate into strong demand.
Recap of the Week's Most Important Stories
1. BP plc has agreed to shell out A$1.785 billion ($1.3 billion) for Woolworths Ltd.'s portfolio of Australian gas stations in a deal that will likely make the London-based oil company one of the nation's biggest fuel providers.
Per the deal, the British energy company will acquire 527 fuel outlets as well as 16 development sites. The Woolworths fuel outlets are supplied by rival Caltex Australia Ltd. Currently, BP owns 350 retail locations across Australia and supplies fuel to an additional 1,000 outlets owned by independent business partners. BP and Woolworths' partnership also includes the continuation and expansion of a scheme offering fuel discounts for supermarket customers.
The purchase by BP marks a deviation from the trend of the recent years that has seen a smaller share of Australia's retail fuel operators being owned by the major oil companies. There are about 6,400 outlets Down Under, while 52% of them were associated with one of the four major oil companies operating in Australia as of Jan 2016, only 9% were directly controlled by them. Subject to regulatory approvals, the transaction is not expected to conclude before Jan 2, 2018. (Read more: BP to Buy Woolworths Australian Gas Stations for $1.3B .)
2. World's largest publicly traded oil company ExxonMobil Corp. announced that it has made a new natural gas discovery in the Papua New Guinea North Highlands.
Located 13 miles (21 kilometers) northwest of the Hides Gas Field, the Muruk-1 well came across similar high-quality sandstone reservoirs as the Hides field, same as the pre-drill expectations. The well was drilled to a depth of 10,630 feet (3,130 meters). Located in petroleum prospecting license 402, the well spans across an acreage of 126,000 acres (510 square kilometers). The size of the discovery is currently being assessed.
Oil Search Limited is the operator of the well with a holding of 37.5%. ExxonMobil holds 42.5% and the remaining 20% is owned by Barracuda Limited, a subsidiary of Santos Limited. Oil Search started drilling the Muruk-1 well on Nov 2.
ExxonMobil's involvement in exploration in Papua New Guinea dates back to the 1930s. Moreover, the Muruk exploration success validates the strength of ExxonMobil's long-term investment approach and reiterates its commitment to Papua New Guinea. (Read more: ExxonMobil Hits Natural Gas in Onshore Papua New Guinea .)
3. Hamilton, Bermuda-based offshore drilling firm SeaDrill Ltd.SDRL reported that it has entered into a three-year agreement extension with Saudi Aramco for the AOD III jackup rig at a rate of $102,740 per day. The contract will now expire in Dec 2019. SeaDrill currently carries a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .
The extension of this agreement is expected to add approximately $112.5 million in contract backlog. Also, this follows the three-year contracts extensions of two sister rigs AOD I and AOD II that are set to expire in Jun 2019 and Jul 2019, respectively.
The three units have been working for Saudi Aramco since 2013. The ownership of these rigs lie with Asia Offshore Drilling - a partnership venture between Seadrill and Mermaid Maritime - that own 66.24% and 33.76% equity interest, respectively. (Read more: Seadrill Signs 3-Year Rig Extension for AOD III Jackup .)
4. Brazil's state-run energy giant PetrobrasPBR reported that it has signed an agreement to divest non-core business assets worth $587 million. This move is to reduce its debts and revive investor confidence shattered by a corruption scandal.
Under the terms of the agreement, Petrobras has agreed to offload its 45.97% stake in sugar and ethanol producer Guarani SA. The buyer, France's Tereos Internacional, is slated to pay $202 million for the buyout.
In a separate arrangement, Petrobras has agreed to divest certain petrochemical assets worth $385 million to Mexican petrochemical company Alpek S.A.B. de C.V. The petrochemical units, namely Petroquimica Suape and Citepe, are located in the state of Pernambuco and can produce 700,000 tons of purified terephthalic acid per year. The units also churn out 450,000 tons of polyethylene terephthalate per year.
Petrobras' asset sale plan is in sync with its efforts to lower its huge debt burden. In fact, the company - with a debt of $122.65 billion at the end of third-quarter 2016 - is the most indebted in the world. As a result, Petrobras intends to divest assets worth $21 billion over 2017-2018. (Read more: Petrobras to Divest Non-Core Assets worth $587 Million .)
5. Italian energy company Eni SpA E recently gained two exploration blocks offshore Cyprus, in the competitive international bid round "3rd Licensing Round." Eni will be the operator of Block 6 with 50% interest, while the balance will be held by partner, France's TOTAL SA. Eni will acquire a 100% stake in Block 8. Eni's successfully explored areas in the neighboring Egyptian offshore, including the Zohr massive gas field, which have geological similarities with these newly awarded areas.
These awards further strengthen Eni's strategic position in the area. Notably, the company was awarded the blocks 9, 3 and 2 in the 2nd international bid round in 2012. The company also holds three exploration blocks on the Egyptian side - Shorouk (where the Zohr field is located), Karawan and North Leil. Eni holds 50% stake and 100% stake in Karawan and North Leil, respectively.
Eni has been enjoying a strong foothold in Cyprus since 2013, where it holds and operates the offshore exploration blocks 2, 3 and 9. (Read more: Eni Wins Twin Exploration Block License in Offshore Cyprus .)
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
Notwithstanding the past week's increase in oil prices, the reaction in energy stocks was negative. As a result, over the course of last week, 'The Energy Select Sector SPDR' was down 1.12%. The worst performer was offshore drilling giant Transocean Ltd.RIG whose stock price fell 3.03%.
But longer-term, over the last 6 months, the sector tracker gained 10.38%. Downstream operator Valero Energy Corp.VLO was one of the major beneficiaries during this period, experiencing a 33.96% price increase.
What's Next in the Energy World?
In this holiday-shortened week, market participants will be closely tracking the regular releases i.e. the U.S. government data on oil and natural gas. Energy traders will also be focusing on the Baker Hughes data on rig count.
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