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Oil & Gas Stock Roundup: As Crude Hits 7-Year Low, Chevron Slashes 2016 Budget

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It was a week where oil prices dropped to levels not seen since Feb 2009 and natural gas futures settled below the $2 level for the first time in over 3 years.

On the news front, Chevron Corp.CVX set its investment budget for 2016 at $26.6 billion, down 24% from this year.

Overall, it was a pretty bad week for the sector. West Texas Intermediate (WTI) crude futures dived 10.9% to close at $35.62 per barrel, while natural gas prices plunged 9% to $1.990 per million Btu (MMBtu). (See the last 'Oil & Gas Stock Roundup' here: Devon Bets on Crude Even as OPEC Inaction Sinks the Commodity .)

Oil prices encountered the year's largest weekly drop in reaction to bearish comments from International Energy Agency (IEA) that sees global oil glut to worsen next year in the face of slowing demand growth. Oil was also undone by OPEC's latest monthly report that showed the oil cartel's November production rising to a 3-year high.

Natural gas also fared badly despite a bullish inventory report that showed a larger-than-expected withdrawal. The heating fuel was weighed down by predictions of tepid early-December demand for the heating fuel due to mild weather spurred by the El Niño phenomenon.

Recap of the Week's Most Important Stories

1. U.S. energy behemoth Chevron Corp. offered a glimpse of its 2016 capital spending plans. The integrated major has pegged its next year's capital budget at $26.6 billion, down 24% from the $35 billion it expects to invest by the end of 2015. Of the total, roughly 90% will go toward oil and gas exploration projects worldwide, and 8% for downstream businesses.

In a separate press release, Chevron announced the commencement of production from the Moho Bilondo Phase 1b project, located off Republic of Congo's coast at a water depth of 2,400 to 4,000 feet. Total production from the prospect - in which Chevron holds a 31.5% working interest - will likely be 40,000 barrels of oil every day.

2. Europe's largest oil company Royal Dutch Shell plcRDS.A has received the unconditional clearance from China to proceed with its $70 billion acquisition of BG Group plc − a leading upstream energy player in the UK. The permission clears the final regulatory obstacle that was in the path of Shell's BG buyout.

Following the green signal from China, the only thing that is left is the approval of shareholders after which the deal will likely be closed by early 2016. However, after getting the Chinese authorization, Shell added its intention to reduce global headcount by 2,800 from the merged entity.

3. The plunge in crude price - from over $100 per barrel in June last year to the recent $35 per barrel mark - has led several firms in the oil industry to take drastic measures to remain afloat. Treading on the same lines, energy infrastructure company Kinder Morgan Inc.KMI announced a cut in its dividend payout beginning with the fourth quarter of 2015. The Houston, TX-based firm plans to lower its quarterly dividend to 12.5 cents, a 75% nosedive from the earlier payout of 51 cents.

Kinder Morgan plans to utilize the funds from the cutback in dividend to fund the equity portion of its expansion capital requirements. This would eliminate the need to tap into external sources for funds to a large extent. Management expects the cut to also translate into a sustained solid investment grade credit rating. The company expects to continue this practice of funding its capital expenditure plans through internal sources in 2017-18 also. (See More: Kinder Morgan Slashes Dividend by 75%, Hits 52-Week Low .)

4. Houston-based energy major ConocoPhillipsCOP released its capital spending budget and operating plan for 2016. The company's 2016 capital budget of $7.7 billion is 25% below the expected 2015 capital spending and 55% lower than that of 2014. Of the total budget, about $1.2 billion or 16% is apportioned for base maintenance and corporate expenditures, $3.0 billion or 39% has been allocated for development drilling programs, $2.1 billion or 27% has been set aside for major projects. The remaining $1.4 billion or 18% is to be used for exploration and appraisal.

The majority of capital will be used for the development of U.S. oil fields, mainly shale formations in Texas and North Dakota, as well as for the Gulf of Mexico and Alaska. ConocoPhillips also intends to allot drilling capital to Malaysia, China, the North Sea and Canada. (See More: ConocoPhillips Updates 2016 Capex and Operational Plans .)

5. Encana Corp.ECA has decided to slash its 2016 capital spending budget by 25% from this year. The Calgary, Alberta-based oil and gas explorer also announced plans to lower its 2016 annual dividend by more than 78%. The announcements were not unforeseen as the company has been hit hard by the persistent weakness in oil price. Following the announcement, Encana fell more than 8% on the NYSE.

The company's projected 2016 capital budget is in the range of $1.5 billion and $1.7 billion. Most importantly, the majority of the amount will be allocated toward four key oil and natural gas properties that comprise the Montney and Duvernay shale fields in Canada and the Eagle Ford and Permian shale resources in the U.S.

Price Performance

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

Company Last Week Last 6 Months
XOM -0.46% -9.19%
CVX +2.65% -10.03%
COP +3.35% -21.72%
OXY -3.77% -13.94%
SLB -3.21% -21.70%
RIG -4.68% -28.22%
VLO -3.17% +15.53%
TSO -7.43% +22.48%

Over the course of last week, 'The Energy Select Sector SPDR' suffered a loss of 2.35% as investors witnessed a bout of heavy selling in major companies. The worst performer was downstream operator Tesoro Corp.TSO whose stock shed 7.4%.

Longer-term, over the last 6 months, 'The Energy Select Sector SPDR' lost 21% of its value. Offshore drilling powerhouse Transocean Ltd.RIG was the main laggard, as it witnessed a 28% price decline. However, refiner Tesoro Corp. was able to buck the trend and was the chief beneficiary on the bourses with its shares advancing 22% during this period.

What's Next in the Energy World?

Apart from the usual releases in this week - the U.S. government data on oil and natural gas - market participants will be closely tracking a series of top-tier economic readings, including those on retail sales, inflation, housing and industrial production.

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CHEVRON CORP (CVX): Free Stock Analysis Report

TESORO CORP (TSO): Free Stock Analysis Report

CONOCOPHILLIPS (COP): Free Stock Analysis Report

ROYAL DTCH SH-A (RDS.A): Free Stock Analysis Report

TRANSOCEAN LTD (RIG): Free Stock Analysis Report

ENCANA CORP (ECA): Free Stock Analysis Report

KINDER MORGAN (KMI): Free Stock Analysis Report

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


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

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