Broader Market:
Crude prices remained flat last week.
A better-than-anticipated October jobs report seemed to ease concerns that last month’s 16-day U.S. government shutdown has eroded demand in the worlds biggest oil consumer. This was aided by positive data about China’s all-important trade sector, allaying some of the fears raised by the unusually weak export numbers in September.
In more positive news, the first read on Q3 GDP came in better than expected, with the economy growing at +2.8% pace instead of the +2% consensus estimate and the final +2.5% growth pace in Q2.
However, at the same time, the recent run of positive economic data, ranging from the ISM surveys to Q3 GDP and October non-farm payrolls, has put the December Taper back on the market’s agenda. Lower Euro-zone growth forecasts for 2014 also weighed on crude prices.
Sentiments were further dampened by the Energy Information Administration (EIA) report that showed another jump in inventories, which remains above the upper limit of the average for this time of the year.
As per the EIA’s weekly ‘Petroleum Status Report,’ crude inventories climbed by 1.6 million barrels for the week ending Nov 25, 2013 to 385.45 million barrels. A drop in refinery utilization rates and steady production led to the stockpile build-up with the U.S. even as imports fell.
What’s more, storage at the Cushing terminal in Oklahoma, the key delivery hub for U.S. crude futures traded on the New York Mercantile Exchange, was also up 991,000 barrels, the fourth straight weekly gain.
As a result of these factors, by close of trade on Friday, West Texas Intermediate (WTI) oil was little changed and settled at $94.60 per barrel, essentially flat for the week.
On the other hand, the broad-based S&P 500 index edged up 0.5% and finished the week at 1,770.61, a day after registering its worst performance in ten weeks. Traders were buoyed by the unanticipated boost in U.S. jobs growth in Oct, taking it as a sign of strength in the world's largest economy. Even the weak consumer sentiment numbers could not deter the bulls.
The Sub-Sectors:
Integrated: Major integrated players were mixed, with the top gainer being Exxon Mobil Corp. (XOM). The world's largest publicly traded oil firm added 4.0% to its share price last week. Exxon Mobil continues to build on its strong momentum from the previous week, when it came out with a quarterly beat, backed by higher liquid and natural gas prices. Investors also cheered Exxon Mobil’s move to restart work in Madagascar, four years after the company announced force majeure following a military coup in the island nation.
San Ramon, CA-headquartered energy behemoth Chevron Corp. (CVX) was another solid performer. Shares climbed 2.7% during the week after the company signed a deal worth up to $10 billion with Ukraine to explore the country’s shale gas deposits, which is trying to reduce its dependence on Russian supplies. Moreover, the supermajor’s court case in Manhattan – to dispute a $19 billion environmental verdict it faces in Ecuador over pollution – took an interesting turn, as the judge who issued the ruling seemed to have little knowledge about his own order.
Overall, however, most of the ‘Big Oil’ is suffering from marginal or falling returns irrespective of the crude price movement, reflecting their struggle to replace reserve base and maintain production growth, as access to new energy resources becomes more difficult.
E&P: While all crude-focused stocks stand to gain/lose from rising/falling commodity prices, companies in the exploration and production (E&P) sector are the most affected, as they are able to extract more/less value for their products. Last week, the SIG Oil Exploration & Production Index traded down 1.7%.
Top decliners include WPX Energy Inc., which plunged 14.7% after coming out with disappointing third quarter results. Plagued by lower natural gas prices, the Tulsa, OK-based energy explorer’s net loss almost doubled, while being much wider than anticipated. Operating performance was also impacted by a decline in total production volumes, compounded by an increase in operating costs. Moreover, the company’s volume guidance was on the weaker side, as it continues to struggle with infrastructure issues in its Marcellus Shale operations.
Shares of Anadarko Petroleum Corp. (APC) shed 3.6% during the week. Much of this seems to be tied to the American oil and gas producer’s failure to match third quarter earnings estimates. Though the company actually announced a rise in profits and also beat revenue projections, it was not enough to appease investors, who expected better growth, considering its premium valuation. A natural gas-weighted production profile – whose economics is floundering – also played its part in bringing down the stock.
Oilfield Services: The oil services group – represented by the Philadelphia Oil Services Sector Index – was up 1.5% through the week.
Leading the pack was offshore driller Transocean Ltd. (RIG), which jumped 12.4% through the week after it delivered a standout quarter. On Wednesday, the Switzerland-based firm reported larger-than-expected earnings and revenues for the three month ended Sep 30 on the back of improved rig utilization and average dayrates.
Two of the best performers last week were oilfield service biggies Weatherford International Ltd. (WFT) and Halliburton Co. (HAL), shooting ahead of their peers with additions of 4.3% and 3.9% to their respective stock prices. Weatherford moved higher after it beat profit view and inked deals with the U.S. government to settle longstanding corruption charges.
Moreover, the Geneva-based drilling equipment manufacturer named a new CFO, which boosted investor sentiment and removed uncertainty regarding the company’s future leadership. On the other hand, Halliburton on Wednesday said its board approved a quarterly dividend of 15 cents per share, up 2.5 cents, or 20%, from the prior quarter.
Refining & Marketing: This has been one sector that has underperformed the rest of the energy industry for the bulk of this year. With refiners being buyers of oil – whose price saw a steep climb recently – their third quarter profitability had been squeezed due to a rise in the input cost and lower crack spreads.
These headwinds were reflected in disappointing results for sector component HollyFrontier Corp. The downstream operator’s earnings – dragged down by collapsing refining margins – were way below estimates.
However, shares of Tesoro Corp. (TSO) – one the largest domestic independent refiners – rallied, up almost 3.8% for the week, after it reported third quarter revenues well above expectations on the strength of higher throughput volumes and improved performance by the retail segment that overshadowed weaker refining margins and steep costs.
On a brighter note, over the past fortnight or so, crude prices have pulled back and spreads have showed signs of strengthening yet again, pointing to the likelihood that the difficult operating environment could be over sooner than what many investors think.
Natural Gas:
Investors continue to focus on temperature patterns to understand the fuel’s economic dynamics. As it is, natural gas fundamentals look uninspiring with supplies remaining ample in the face of underwhelming demand. In fact, it is expected to take many years for the commodity’s demand to match supply in the face of newer projects.
The EIA's weekly inventory release showed that natural gas stockpiles held in underground storage in the lower 48 states rose by 35 billion cubic feet (Bcf) for the week ended Nov 1, within the guided range (of 34–38 Bcf gain). The increase – the thirtieth injection of 2013 – exceeded last year’s build of 27 Bcf but was marginally lower than the 5-year (2008–2012) average addition of 36 Bcf for the reported week.
The bullish speculators are betting on the upcoming winter heating season (Nov through Mar) to spur the commodity’s demand for heating. Chilly weather forecasts – in East U.S. over the next ten days or so – have proved to be the catalyst. As a result, natural gas spot prices ended Friday at $3.56 per million Btu (MMBtu), up 3.2% over the week.
Performance Chart:
Oil and Gas Stocks
Apart from the usual suspects – the U.S. government data on oil and natural gas – market participants will be closely watching the coming Janet Yellen confirmation hearings to get a sense of the new Fed Chair’s thinking on the bond buying policy.
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