Oil & Gas Stock Roundup: Harvey's Havoc, TOTAL's Acquisition, Chevron's CEO Transition

It was a week where Tropical Storm Harvey dictated the prices of oil and natural gas. In particular, gasoline shortages caused by the storm boosted the fuel to almost 2-year highs.

On the news front, France’s TOTAL S.A. (NYSE:TOT) agreed to acquire Danish shipping giant A.P. Moller-Maersk’s oil and gas unit for $7.45 billion, while American supermajor Chevron Corporation’s (NYSE:CVX) Chief Executive John Watson is reportedly planning to leave his post by next month.

Overall, it was a mixed week for the sector. While West Texas Intermediate (WTI) crude futures pulled back 1.6% to close at $47.87 per barrel, natural gas prices remained essentially unchanged at $2.892 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Transocean, Chevron & More.)

Despite a hefty inventory draw, oil prices recorded another weekly decline. The U.S. Energy Department's inventory release showed that crude stockpiles recorded another big drop on continued strong refinery runs. With oil supplies falling for the eighth 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. The commodity got further fillip from the reduction in U.S. rig count (number of rigs searching for oil) for the third week in four.

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 9.528 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 was unchanged despite an in-line increase in supplies. In particular, worries over the fuel’s tepid demand on the back of bearish weather predictions and Tropical Storm Harvey-related power outages offset the gains from the inventory data and pushed down natural gas prices to week-ago levels.

Gasoline Price Spikes on Harvey Shutdowns

But the major mover for the week was gasoline. The most widely used petroleum product ended around 2.6% higher on the week to $1.667 a gallon after Tropical Storm Harvey caused weeks of disruptions at refineries in its path and shut units, spark fires and create supply shortage affecting facilities for months.

The Gulf of Mexico, which is expected to bear the brunt of the storm, is the energy hub of the United States. It accounts for about 18% and 5% of the total oil and gas production of the nation respectively. The region is also a home to about 50% of the country’s refining capacity. Refineries in the path of the storm have already shuttered leading to weaker crude demand and reduced gasoline supply.

The sudden outages in the refineries have driven up gasoline prices on anticipated supply shortages. And with the expectation of lower crude demand due to refinery outages, traders are selling oil.

Recap of the Week’s Most Important Stories

1. French energy giant TOTAL S.A. announced that it has entered into a definite agreement to acquire Denmark-based Maersk Oil & Gas A/S (Maersk Oil) in a share and debt deal worth $7.5 billion.

This acquisition – expected to close in the first quarter of 2018 – will allow TOTAL to combine Maersk Oil’s high-quality assets spread globally with its existing assets. The combination of Maersk Oil’s North-Western Europe businesses with TOTAL’s existing portfolio will position the latter as the second largest operator in the North Sea with strong production profiles in the U.K., Norway and Denmark.

TOTAL will be able to increase its aggregate hydrocarbon production level to 3,000 thousand barrels of oil equivalent per day in 2019 from 2,500 thousand barrels of oil equivalent per day at the end of second quarter of 2017. Internationally, in the U.S. Gulf of Mexico, Algeria, East Africa, Kazakhstan and Angola there is an excellent fit between TOTAL and Maersk Oil’s businesses allowing for value accretion through commercial, operating and financial synergies.

This acquisition is going to be immediately accretive to TOTAL’s earnings per share and cash flow. The company expects to generate operational, commercial and financial synergies of more than $400 million per year. (Read more TOTAL Acquires Maersk Oil for $7.45B, Expands Globally.)

2. As per media reports, Chevron’s CEO John Watson is planning to step down, as the company seeks managerial changes to deal with the volatile dynamics of the oil industry. Chevron is expected to announce the transition next month and the company’s vice chairman Michael Wirth is highly anticipated to replace Watson as the new CEO.

Watson was appointed as the CEO in 2010. During his seven years of checkered tenure he remained focused on three major strategies. These include the acceleration of the development of Chevron’s Permian holdings, cost-cutting initiatives amid the industry downturn and planned completion and execution of its mega projects.

Though oil prices have improved from their lows, but still they are hovering around or below the $50 per barrel mark. Persistent weakness in oil prices poses challenge to the upstream operations of the company as it is not being able to sell crude at attractive prices and hence is unable to generate significant cash flows for shareholders. Chevron, being an integrated player, is trying to increase its focus on downstream business which can be profitable in the current environment.

With the election of Wirth — who has substantial knowledge and experience regarding refining and petrochemicals — as the CEO, Chevron will follow the footsteps of energy majors like Exxon Mobil Corporation (NYSE:XOM), Royal Dutch Shell (LON:RDSa) plc and TOTAL S.A., all of whose CEO’s are refining specialists.(Read more: Chevron's CEO Watson Likely to Step down, Wirth to Take Over.)

3. Offshore contract driller SeaDrill Limited (NYSE:SDRL) reported a break even in the second quarter earnings, which compared favorably with the Zacks Consensus Estimate of a loss of 6 cents. The Zacks Rank #3 (Hold) company delivered a strong 97% economic utilization of its floater fleet and 98% on its jack-up fleet. However, the bottom line deteriorated from year-ago adjusted earnings of 59 cents per share owing to lower revenues and high restructuring costs. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Total operating revenues of $577 million in the reported quarter was down 34% from $868 million in second-quarter 2016. Lower revenues are attributed to the lower day rates along with West Tucana and Sevan Louisiana drillships which remained idle during the quarter.

As of Aug 24, total order backlog at SeaDrill was $3.1 billion. This comprised $1.2 billion for the floater fleet and $1.9 billion for the Jack-up fleet. The average contract duration is 10 months for floaters and 30 months for Jack-ups.

SeaDrill which reported a net loss of $15 million in the quarter and is battling with huge debt and liabilities is in advanced discussions with lenders regarding the restructuring of debts. The company is likely to file for Chapter 11 within three weeks. In July 2017, the company reached an agreement with its bank group to extend the date to Sep 12 by which a comprehensive restructuring plan must be agreed upon. (Read more: Seadrill Q2 Earnings Break Even, Sales Down Y/Y.)

4. Energy infrastructure provider The Williams Companies, Inc.’s (NYSE:WMB) Constitution Pipeline project recently suffered a major setback when the U.S. 2nd Circuit Court of Appeals reiterated New York Department of Environmental Conservation’s (DEC) decision to stall the pipeline. The court’s ruling came as a blow to pipeline developers’ endeavors to transport additional natural gas to New England, which relies heavily on pipeline imports from Canada and overseas.

The $750 million, 121-mile project – jointly owned by William Companies, Cabot Oil & Gas Corporation (NYSE:COG), WGL Holdings, Inc. and Piedmont Natural Gas Company – runs from Pennsylvania to Schoharie County and was supposed to transport natural gas from the Marcellus shale to customers in the North East. The pipeline aimed to address the problems of transportation infrastructure in the Northeast region and speed up shipments from the prolific Marcellus and Utica basins.

The project was expected to become operational in 2015, but got delayed due to lengthy review process, pushing the in-service date to late 2016. The project received the Federal Energy Regulatory Commission’s (FERC) approval in early 2016.

The latest decision reverses FERC’s approval received by the project. Also, the company has been directed to reassess the environmental impacts of the pipeline. (Read more: Williams Companies' Constitution Pipeline Suffers Set Back.)

5. The board of directors of the Brazilian oil giant Petrobras (NYSE:PBR) recently approved the corporate restructuring of its fuel distribution arm Petrobras Distribuidora S.A. The restructuring will involve a capital contribution by Petrobras to its subsidiary and a partial spin off. The capital injection will be used for the pre-payment of debts contracted by Petrobras Distribuidora and guaranteed by Petrobras.

The state-run integrated major is set to invest R$ 6.3 billion (or 2 billion in USD) into its fuel distribution subsidiary which is grappling with heavy debt for years. The move comes after the Brazilian government proposed to sell the controlling stake in Centrais Elétricas Brasileiras SA or Eletrobras on Aug 22 to balance the budget deficit and promote competition and efficiency to the business.

Petrobras supplies gas to the state-controlled utility and the latter owes Petrobras and its various subsidiaries around R$10.4 billion. The capital investment is expected to strengthen the balance sheet of Petrobras Distribuidora thus enabling it to attract investors for its initial public offer. (Read more: Petrobras to Invest R$ 6.3B in Fuel Distribution Arm.)

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 +1.6% return last week. The best performer was offshore drilling rig operator Transocean Ltd. (NYSE:RIG) , whose stock rose by 9.5%.

Longer-term, over the last 6 months, the sector tracker lost 11.3%. Ironically, it was again Transocean, which was the major laggard during this period, experiencing a 42% 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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