Oil & Gas Stock Roundup: Transocean to Scrap More Rigs, Kinder Morgan to Build Crude Storage - Analyst Blog

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It was a week where both oil and natural gas futures settled up on positive inventory reports. On the news front, Transocean Ltd.RIG announced the scrapping of two more offshore rigs, while Kinder Morgan Inc.KMI announced a 50-50 joint venture to build a new crude oil storage terminal in Edmonton.

Overall, it was a bullish week for the sector. While resurgent West Texas Intermediate (WTI) crude futures climbed edged up 0.6% to close at $49.14 per barrel, natural gas prices rose 3% to $2.71 per million Btu (MMBtu). (See the last 'Oil & Gas Stock Roundup' here: Exxon Starts at Hadrian South, Whiting Petroleum Scraps Sale. )

Oil prices gained for the third week in a row, encouraged by the U.S. Energy Department's latest inventory release. Though the report showed that crude stockpiles recorded another massive build -- the twelfth in a row -- traders chose to focus instead on a small decline in domestic production and a sharp drop in gasoline supplies.

But by the end of the holiday-shortened week, most of the commodity's gains were erased by the Iranian nuclear deal that has the potential to release more oil in the already oversupplied market.

Natural gas fared even better, encouraged by a better-than-expected supply drawdown.

Recap of the Week's Most Important Stories

1. Offshore drilling giant Transocean Ltd. announced that it has added two more rigs to its scrap list. The company plans to scrap the rigs GSF Aleutian Key and Sedco 707, which were previously classified as held for sale.

The company anticipates a non-cash charge of about $90-$110 million in the first quarter as it plans to scrap the rigs. This brings Transocean's total scrap list to 18. In its latest fleet update, which was published last month, the company announced plans to scrap four rigs. (See More: Transocean to Scrap 2 More Rigs, Record Charge in Q1 )

2. Houston, TX-based oil and gas pipeline company Kinder Morgan Inc. announced a equally owned joint venture with Canada's Keyera Corp. to build a new crude oil storage terminal in Edmonton, Alberta. The joint venture owners have entered into long-term, firm take-or-pay agreements with strong, credit-worthy customers to build 4.8 million barrels of crude oil storage at a new facility called the Base Line Terminal.

KMI's investment in the joint venture terminal is approximately CAD$342 million (including capitalized interest) for an initial 12 tank build-out. The commissioning is expected to begin in the second half of 2017. Separately, KMI will invest up to an additional CAD$69 million outside the joint venture in connecting pipelines and related infrastructure for a total project investment of approximately CAD$411 million. The terminal is under development on land owned by Keyera and will be operated by Kinder Morgan. (See More: Kinder Morgan to Build New Crude Oil Storage Terminal )

3. Oil giant BP plcBP if of the opinion that an oil spill fine higher than $2.3 billion would drain its U.S. unit of cash and threaten its future operations in the Gulf of Mexico (GoM). The company faces up to $13.7 billion in fines for pollution caused by the Apr 2010 disaster.

Under the US Clean Water Act, an additional fine of about $18 billion could be slapped on BP if it is found guilty of gross negligence for the Deepwater Horizon blowout that killed 11 workers and spilled millions of barrels of oil in the GoM. It took nearly three months for BP to cap the well, which was finally sealed in September. BP had continuously maintained that a strong ruling over America's biggest offshore oil accident could be evaded. (See More: BP Fears U.S. Unit Insolvency on Deepwater Horizon Spill Fine )

4. Williams Partners L.P.WPZ announced its decision to acquire an additional 21% equity interest in UEO from a subsidiary of EV Energy Partners, L.P. EVEP . The partnership already holds a 49% equity interest in Utica East Ohio Midstream LLC ("UEO") through its subsidiary - Utica Gas Services. The transaction is valued at about $575 million.

Post acquisition, Williams Partners will own an equity interest of 70% in UEO. UEO has significant natural gas midstream business in the Utica Shale in eastern Ohio. The gathering, processing, fractionation and storage assets are supported by long-term, fee-based contracted commitments.

5. Italian oil and gas company Eni SpAE announced that its affiliate has entered into a contract with Hercules Offshore to use one of the latter's jackup rigs for work in West Africa. The contract is scheduled to come into effect from early Apr 2015. The operator is expected to reimburse all the costs for contractspecific upgrades.

The five-year contract for the rig Hercules 260 (250' ILC) has its dayrate depending on the future price of Brent crude. Per the contract, the dayrate will range from a minimum of $75,000 per day when the price of Brent crude oil is $86 or less per barrel. The maximum dayrate is expected at $125,000 per day when the price of Brent crude oil is $125 or more per barrel. (See More: Eni Inks Contract with Hercules for Work in West Africa )

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 +0.18% -9.93%
CVX +0.99% -9.46%
COP +2.43% -12.77%
OXY +3.60% -17.88%
SLB +2.01% -12.83%
RIG +13.08% -46.64%
VLO -5.03% +33.12%
TSO -3.09% +39.71%

Offshore contract driller Transocean Ltd. rode the oil price resurgence and was the week's best performer among the market heavyweights, adding 13.1% to its stock price. The biggest loser was downstream operator Valero Energy Corp.VLO which fell 5%. With refiners being buyers of crude, a strengthening commodity price has triggered fears for weaker margins.

Over the last 6 months, another refiner Tesoro Corp.TSO has been the chief beneficiary on the bourses with its shares advancing 39.7%. Investors have rewarded the company for its continued focus on shareholder returns. Meanwhile, Transocean was the laggard, as it witnessed a 46.6% price decline over the same time frame on the back of rig oversupply that has led the industry into a cyclical downturn.

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 crucial economic reports, including the consumer credit and jobless claims numbers.

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BP PLC (BP): Free Stock Analysis Report

VALERO ENERGY (VLO): Free Stock Analysis Report

WILLIAMS PTR LP (WPZ): Get Free Report

TESORO CORP (TSO): Free Stock Analysis Report

ENI SPA-ADR (E): Free Stock Analysis Report

TRANSOCEAN LTD (RIG): Free Stock Analysis Report

KINDER MORGAN (KMI): Free Stock Analysis Report

EV ENERGY PTNR (EVEP): Get Free 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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