Oil & Gas Stock Roundup: Gasoline Soars Amid MPC's Drop-Down Deal, NBR's Acquisition

It was a week where oil prices suffered another loss, while natural gas futures tallied a gain. However, in terms of price action, gasoline has been the market mover. With refinery activity along the Gulf Coast remaining affected from the impact of Hurricane Harvey, the fuel rallied to a two-year high.

On the news front, downstream operator Marathon Petroleum Corp. (NYSE:MPC) said it would transfer certain assets to an affiliate in a $1.05 billion stock and cash deal, while land-drilling contractor Nabors Industries Ltd. (NYSE:NBR) entered into an agreement to buy Norway’s Robotic Drilling Systems.

Overall, it was a mixed week for the sector. While West Texas Intermediate (WTI) crude futures pulled back 1.2% to close at $47.29 per barrel, natural gas prices soared about 5% to $3.07 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Harvey's Havoc, TOTAL's Acquisition, Chevron (NYSE:CVX)'s CEO Transition.)

Despite another hefty inventory draw, oil prices recorded their fifth successive weekly decline. The U.S. Energy Department's inventory release showed that crude stockpiles recorded a big drop on continued strong refinery runs. With oil supplies falling for the ninth week, investor sentiment has turned slightly positive on dissipating fears about a meltdown to sub-$40 levels. Analysts also believe that the trend, if sustained, could help tighten the market significantly.

However, these positive effects were more than offset by the steadily rising domestic oil output that continues to be the biggest headwind for the market. At 9.5 million barrels a day, production is at the highest level in more than two years, thereby cancelling out cuts from OPEC and its allies.

Meanwhile, natural gas traded up handsomely following a below-average increase in supplies. This caused the current storage level – at 3.155 trillion cubic feet (Tcf) – narrow its surplus to the five-year average to just 8 Bcf (0.3%), while stocks have now fallen 239 Bcf (7%) below the year-ago figure.

Gasoline Soars on Harvey Shutdowns

But for the second week running, the major mover was gasoline. The most widely used petroleum product ended more than 13% higher on the week to $1.748 a gallon in the aftermath of Tropical Storm Harvey knocking out refining operations in the Houston area. Harvey caused weeks of disruptions at facilities in its path - shutting units, sparking fires and creating supply shortage possibly extending for months.

Recap of the Week’s Most Important Stories

1. Refining and marketing giant Marathon Petroleum Corporation recently divested some of its pipelines and storage assets to MPLX L.P. (NYSE:MPLX) . The move helped Marathon Petroleum to garner proceeds of $1.05 billion – $630 million in stock and $420 million in cash – from its master limited partnership.

Marathon Petroleum has offloaded its entire stake in four jointly owned properties including Explorer Pipeline Co., Lincoln Pipeline LLC, MPL Louisiana Holdings LLC and LOCAP LLC. In each of these properties the company carries 24.51%, 35%, 40.7% and 58.52% interests, respectively. These assets are expected to generate $138 million of adjusted EBITDA in 2018.

The divesture is in sync with Marathon Petroleum’s strategic objectives. To accelerate value accretion for shareholders and boost growth, Marathon Petroleum is actively engaged in drop-down transactions lately. In March, the company divested of some of its terminal, pipeline and storage assets to MPLX for $2.02 billion.

The company also plans to streamline portfolio and enhance core competencies. For the same, it is soon to a take a final call regarding the spinoff of its retail network unit — Speedway LLC. (Read more Marathon Petroleum Vends $1.05 Billion Assets to MPLX.)

2. Oil and gas drilling operator Nabors Industries Ltd. recently agreed to buy Norwegian drill-floor solution developer, Robotic Drilling Systems. This marked Nabors’ second acquisition in August following the transaction to buy Tesco (LON:TSCO) Corporation.

The main shareholders of Robotic Drilling, Odfjell Drilling, Statoil (OL:STL) ASA, Investinor and Westcon have agreed to the acquisition. With 37% stake in Robotic Drilling, Odfjell Drilling Technology Ltd, a wholly owned subsidiary of Odfjell Drilling, is the major shareholder.

Nabors and Odfjell Drilling have signed a memorandum of understanding for strategic cooperation. The deal is expected to close in the third quarter of 2017. Although the transaction amount will be decided upon closing of the deal, Odfjell Drilling is anticipated to receive an accounting gain of around $11 million. Per the deal, Odfjell Drilling will have continuous access to the technologies of Robotic Drilling for its present and future rigs.

The transaction is likely to improve Nabors’ available technology base. It will also help Nabors to become a provider of drilling products and services from being just a provider of onshore and offshore drilling rigs. It will increase the company’s potential to attract more clients. (Read more: Nabors to Acquire Robotic Drilling Systems in Q3.)

3. Chinese oil and gas giant PetroChina Company Limited (NYSE:PTR) announced first-half 2017 earnings of RMB 12,676 million or RMB 0.069 per diluted share compared with RMB 531 million or RMB 0.003 per share a year earlier. Moreover, China’s dominant oil and gas producer’s total revenues for the six months rose 32% from the year-ago period to RMB 975,909 million.

The positive comparisons can be primarily attributable to higher oil prices, which helped its biggest unit — exploration and production — to swing to profitability. Interestingly, the The Zacks Rank #3 (Hold) company has decided to pay all of its first-half profit of RMB 12,676 million as interim dividend to its stockholders. On a bearish note, PetroChina’s total production of oil and natural gas declined 3% year over year to 725.7 million barrels of oil equivalent. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

At the end of the semester, PetroChina’s cash balance was RMB 114,538 million, while cash flow from operating activities was RMB 144,833 million. Capital expenditure for the period was RMB 62,339 million, 22.6% higher than the year-ago level. (Read more: PetroChina Half-Year Profits Surge on Crude Revival.)

4. Arc Logistics Partners L.P. (NYSE:ARCX) , with the help of its initial limited partner Lightfoot Capital Partners, LP, entered into a definitive merger agreement with Zenith Energy U.S., L.P. Per the deal, Zenith Energy will acquire Arc Logistics, an oil and gas midstream firm.

Per the terms of the agreement – expected to close between the fourth quarter of 2017 and the first quarter of 2018 – the acquirer will receive all outstanding public common units and also the common units held by Lightfoot and other private interests held by Arc Logistics’ sponsors.

The deal is subject to approval from the majority of Arc Logistics' outstanding common unit holders. The expiration of the waiting period per the Hart-Scott-Rodino Antitrust Improvements Act of 1976 will be considered while deciding the partnership's fate. Lightfoot, which holds 26.8% of the outstanding units, has already approved the deal.

In terms of assets, the deal requires the closing of Zenith's buying certain interests in Arc Terminals Joliet Holdings from the EFS Midstream Holdings. The assets include a crude oil pipeline in Joliet, IL and a crude oil unloading facility. It also includes 5.5% interest in Gulf LNG Holdings possessing a liquefied natural gas regasification and storage facility in Pascagoula, MS. (Read more: Arc Logistics, Zenith Energy Merger Moves a Step Closer.)

5. Midstream player Energy Transfer Partners L.P. (NYSE:ETP) recently received approval from the Federal Energy Regulatory Commission (FERC) to offer Phase 1A of the Rover Pipeline. Phase 1A signifies the portion of the Rover Pipeline that spreads over 212 miles and will carry natural gas from Cadiz, OH, to Defiance, OH. The pipeline initiated service on Aug 31.

Investors should know that the pipeline – being constructed by Energy Transfer – will likely be fully operational by November 2017. The full-line will spread over 713 miles and is expected to carry natural gas from the promising shale plays of Marcellus and Utica to the U.S markets. The pipeline will transport 3.25 billion cubic feet of natural gas daily. The broader Rover Pipeline will also reach natural gas to the storage hub at Ontario, Canada.

Once the $4.2 billion-worth Rover Pipeline starts full operation, we expect it to generate sufficient cashflow for the unitholders of Energy Transfer. (Read more: Energy Transfer Gets FERC Permit for Partial Rover Startup.)

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.

The Energy Select Sector SPDR – a popular way to track energy companies – generated a +1.4% return last week. The best performer was offshore drilling rig operator Transocean Ltd. (NYSE:RIG) , whose stock rose by 11.2%.

Longer-term, over the last 6 months, the sector tracker lost 11.7%. Ironically, it was again Transocean, which was the major laggard during this period, experiencing a 36.7% price decline.

What’s Next in the Energy World?

While the energy companies will be busy assessing the storm’s impact on the industry, market participants will be closely tracking the regular releases -- i.e. the U.S. government statistics on oil and natural gas, one of the few solid indicators that comes out regularly. Energy traders will also be focusing on the Baker Hughes data on rig count.

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