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Oil & Gas Stock Roundup: Tesoro's Drilling JV, SeaDrill's Q1 Beat & More

It was a week where oil prices tumbled after the much-anticipated OPEC meeting underwhelmed investors, while a bearish build created selling pressure on natural gas futures.

On the news front, refining giant Tesoro Corp. TSO established a drilling joint venture in Utah’s Uinta Basin with upstream operator EP Energy Corp. EPE, while offshore drilling contractor SeaDrill Ltd. SDRL reported better-than-expected first-quarter profit on significant cost reductions.

Overall, it was a rough week for the sector. West Texas Intermediate (WTI) crude futures fell 1.7% to close at $49.80 per barrel, while natural gas prices edged down 0.6% to $3.236 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Halliburton's New CEO, National Oilwell's Saudi JV & More.)

Oil prices slumped below $50 a barrel after the extension of supply curbs by top producers led by OPEC disappointed markets. At a meeting in Vienna on Thursday, the cartel (plus non-members led by Russia) decided to roll over their output cuts of 1.8 million barrels per day (bpd) to reduce global oil inventories until Mar 2018. The move, though widely expected, spooked some oil market investors who hoped that the cuts would be deepened/lengthened further. 

Natural gas turned lower too following a larger-than-expected storage build. The commodity was also undone by predictions of mild temperatures over the next two weeks that will limit cooling demand for the fuel.

Recap of the Week’s Most Important Stories

1.    Independent oil refiner and marketer Tesoro Corp. has tied up with Texas-based upstream energy player EP Energy Corp. to fund oil and natural gas development in Uinta Basin in Utah. The companies recently inked a deal to form a drilling joint venture (JV) to operate 60 wells in order to support EP Energy’s Altamont program.

Per the agreement terms, Tesoro will provide capital in exchange for 50% of the working interest in the wells. EP Energy will contribute $64 million in net capital to the deal and will retain the operational control of the assets.

The companies have also signed a Crude Oil Supply Agreement under which Tesoro will purchase all the oil produced by the JV as well as the additional crude produced by other properties of EP Energy in the Uinta basin. This agreement will ensure continued supply of crude oil to Tesoro’s Salt Lake City Refinery.

For Tesoro, the agreement is likely to enhance the value of its Rockies assets as well as guarantee additional supply of crude oil. This is likely to boost the operation of the company’s Salt Lake City Refinery further. The oil supplied by this project will lead to higher rates and improve profitability of Tesoro’s refinery. (Read more: Tesoro, EP Energy Team Up to Form Drilling Joint Venture.)

2.    Offshore contract driller SeaDrill Ltd. reported first-quarter 2017 earnings per share – excluding one-time items – of 6 cents. The bottom line surpassed the Zacks Consensus Estimate of a loss of 5 cents. The better-than-expected results came on the back of lower operating expenses during the quarter. The company delivered a strong 97% economic utilization of its floater fleet and 98% on its jack-up fleet.

Like other offshore contract drillers, SeaDrill has also decided to focus on controlling costs amid plummeting crude prices. The company has trimmed its headcount from 6,995 at year-end 2015 to 5,196 at the end of the first quarter.

SeaDrill incurred operating expenses of $491 million in the reported quarter. This reflects a decline of 13.6% from the year-ago quarter figure of $568 million. The decrease is primarily attributed to the lower vessel and rig operating expenses which decreased about 27% in the quarter from the year ago figure of 290 million.

As of May 24, 2017, total order backlog at SeaDrill was $3.4 billion. This comprised $1.4 billion for the floater fleet and $2.0 billion for the Jack-up fleet. (Read more: SeaDrill Posts Earnings in Q1, Revenues Lag Estimates.)

3.    Texas-based midstream energy player Targa Resources Corp. TRGP announced plans to raise equity to fund the construction of its new natural gas liquids (‘NGL’) pipeline – Grand Prix. Targa Resources currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The NGL pipeline will connect Permian Basin in west Texas and New Mexico to the company’s plant in Mont Belvieu, east of Houston. The pipeline will transport volumes from the Permian Basin and Targa's North Texas system to the company’s fractionation and storage complex in the NGL market hub at Mont Belvieu.

Total capital expenditure associated with the Grand Prix project is expected to be around $1.3 billion, out of which the company intends to spend approximately $250 million in 2017. The company's total capex budget for 2017 totaled approximately $1.25 billion. Targa expects Grand Prix’s transport capacity to be approximately 300,000 barrels per day (bpd), expandable up to 550,000 bpd. The pipeline is expected to come into service in the second quarter of 2019.

Targa, which is one of the largest gatherers and processors of natural gas in the Permian, has been looking for opportunities to leverage its growing gathering and processing volumes to additional downstream options. Grand Prix is likely to enhance the company’s ability to move customers’ volumes from the wellhead in the Permian Basin and North Texas to key petrochemical and export markets. (Read more Targa Prices Equity Offering to Fund $1.3B Pipeline Project’)

4.    Oil field services player Oceaneering International Inc. OII recently signed a deal with a leading energy firm to offer remotely operated vehicle (‘ROV’) services for the development of offshore projects in Newfoundland and Labrador in Canada. The identity of the company receiving services from Oceaneering was not disclosed.

Oceaneering is likely to provide two ROV units on a multi-function platform support vessel. The company is anticipated to offer its services to the customer up to 2026. It is to be noted that the oil field services player will be responsible for subsea construction, maintenance and repair works and inspection activities on obtainable and future infrastructure.

The aforesaid contract reflects Oceaneering’s ability to accomplish projects for valuable customers with minimal cost by utilizing highly advanced equipment as well as an experienced and trained workforce. Also, the deal has expanded the company’s businesses in the Atlantic Canada. Oceaneering already has a huge project backlog, which reflects its potential to generate significant cash flows for shareholders in the long run. (Read more: Oceaneering to Provide ROV Services to Leading Firm in Canada.)

5.    Asia’s largest oil refiner, China Petroleum & Chemical Corp., or Sinopec SNP announced that it has begun developing the country's biggest natural gas storage and logistics facility in the central Henan province. The facility will likely have the capacity to store 10 billion cubic meters (bcm) of natural gas.

Work on the facility is expected to be completed next year and it is anticipated to start operations in May 2018. It will supply natural gas to Beijing, Tianjin and the central sections of China.

China’s air pollution level has drawn the government’s attention and pushed it to take measures to reduce emissions. The government is preparing to switch to cleaner alternatives of coal-fired boilers and heating systems, like natural gas and electricity, across 28 smoggiest cities of the country. The transformation to cleaner energy is likely to be completed by Oct 2017.

The state-owned energy company's decision to build the facility complements the Chinese government’s plans of investing more on natural gas pipeline and storage facilities to diversify the energy mix. (Read more: Sinopec Starts Developing the Largest Gas Facility in China.)

Price Performance

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.

Company

Last Week

Last 6 Months

XOM

-0.04%

-5.69%

CVX

+0.33%

-5.23%

COP

-2.18%

-0.33%

OXY

+1.50%

-10.81%

SLB

-0.74%

-13.53%

RIG

-7.71%

-16.14%

VLO

-2.32%

-2.10%

TSO

+1.55%

-1.07%

Over the course of last week, the Energy Select Sector SPDR – a popular way to track energy companies – fell by 0.64%. The worst performer was offshore drilling giant Transocean Ltd. RIG whose stock price plunged 7.71%.

Longer-term, over the last 6 months, the sector tracker is down 7.11%. Transocean was again the major laggard during this period, experiencing a 16.14% price decline.

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 statistics on oil and natural gas. Energy traders will also be focusing on the Baker Hughes data on rig count.

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Targa Resources, Inc. (TRGP): Free Stock Analysis Report
 
China Petroleum & Chemical Corporation (SNP): Free Stock Analysis Report
 
Tesoro Corporation (TSO): Free Stock Analysis Report
 
Oceaneering International, Inc. (OII): Free Stock Analysis Report
 
Transocean Ltd. (RIG): Free Stock Analysis Report
 
Seadrill Limited (SDRL): Free Stock Analysis Report
 
EP Energy Corporation (EPE): Free Stock Analysis Report
 
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