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Oil & Gas Stock Roundup: Deals from Shell, Halcon & Abraxas

It was a week where both oil and gas prices ended higher to tally a gain of more than 4%.

On the news front, supermajor Royal Dutch Shell plc RDS.A as well as independent producers Halcón Resources Corp. HK and Abraxas Petroleum Corp. AXAS announced separate deals to offload major chunk of non-core holdings.

Overall, it was a good week for the sector. West Texas Intermediate (WTI) crude futures jumped 4.7% to close at $46.54 per barrel, while natural gas prices gained 4.1% to $2.98 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Apache's Canadian Exit, Halliburton's Acquisition & More.)

Oil prices scored just their second gain in eight weeks, bolstered by the U.S. Energy Department's inventory release that showed a sharp decline in crude stockpiles for the second week in a row. With its biggest fall in 10 months, domestic oil supplies have dropped below 500 million barrels for the first time since late January. Government figures also showed a surprise draw in gasoline inventories.

Investors were also encouraged by the energy watchdog IEA’s faster-than-expected oil demand growth forecast and growth in Chinese crude imports.

However, oil still remains in a bear market as the U.S. is awash with excess oil amid ever increasing output - the biggest headwind for the sector. As per the latest data, domestic crude production rose to 9.40 million barrels per day, the most since July 2015.

Meanwhile, natural gas also turned sharply higher following a smaller-than-expected increase in weekly supplies and optimism over the fuel’s strong demand on the back of bullish weather predictions.

Recap of the Week’s Most Important Stories

1.    European oil giant Royal Dutch Shell plc recently inked a $1.23 billion deal to divest interests in the Corrib gas venture off the North Mayo Coast of Ireland. The move marks the exit of the upstream business of the company in Ireland.

Per the deal – scheduled to close in the second quarter of 2018 – Shell’s Irish subsidiary will offload its 45% stake in the Corrib natural gas field project to a unit of Toronto-based Canada Pension Plan Investment Board. Shell’s share of output from the Corrib gas field was 27,000 barrels of oil equivalent per day last year.

For Shell, the deal is part of its portfolio optimization strategy and the $30 billion global divestment program for 2016–2018. The company had sold assets worth $5 billion last year, while in 2017 Shell divested more than $15 billion of properties.

Further, the transaction also complements Shell’s strategy to mitigate climate risks and focus on renewable energy as Corrib gas field has been facing severe opposition by environmentalists and locals since 2005 for polluting the environment. (Read more: Shell to Vend Corrib Project Assets in Ireland for $1.23B.)

2.    Shares of US-based upstream company Halcón Resources Corp. moved up 51.35% to eventually close at $6.75 on Jul 12. The upside was driven by the company’s announcement of the divesture of Williston Basin assets to increase its focus on the prolific Delaware Basin where it currently owns over 41,000 net acres in Ward and Pecos counties.

Per the deal, Halcón will offload the Williston Basin assets in North Dakota to a private energy firm unit Bruin E&P Partners, LLC. Halcón will sell around 104,000 net acres of oil and gas properties – in McKenzie, Williams, Mountrail and Dunn counties in North Dakota – that have a production capacity of around 29,000 barrels of oil equivalent per day (boe/d).

The transaction is valued at $1.4 billion, all in cash. Halcón plans to use the proceeds from the sale for debt reduction. The company intends to purchase up to half of its 6.75% unsecured notes due 2025 and redeem all outstanding 12.0% second lien notes due 2022, including related prepayment premiums.

Subject to regulatory approvals and satisfactory closing conditions, the deal is scheduled to close in August. If the deal fails, Halcón will pay Bruin E&P $42 million as compensation. (Read more: Halcon to Vend Williston Assets, Eyes Delaware Basin.)

3.    San Antonio, TX-based oil and natural gas explorer Abraxas Petroleum Corp. recently entered into acquisition and divesture deals to boost its acreage in the prolific Permian on one hand and divest the non-core holdings on the other in Powder River Basin.

The company is set to buy 973 net acres in the Delaware Basin, located in the Permian Basin oilfield in West Texas. The acquisition will add 445 acres in Caprito leasehold, 172 acres in Ward County and 356 acres in Reeves, Pecos and Winkler Counties. Production capacity of the acquired assets amounts to 130 barrels of oil equivalent per day.

The acquisition will be funded by a combination of cash, stock and land. Abraxas will pay $4.3 million in cash and $2 million shares for the acquisition. In addition, it will trade around 12, 000 net acres and half of its mineral rights in Cayanosa land. Subject to satisfactory closing conditions and regulatory approvals, the deal is set to close in August.

In a separate deal, Abraxas has planned to offload acreage in Powder River Basin in Wyoming for $4.6 million to an undisclosed buyer. The proceeds from the divestment will be utilized to finance the cash portion of the acquired assets in Delaware Basin. Production capacity of the divested assets is 100 barrels of oil equivalent per day in March. (Read more Abraxas to Buy in Delaware Basin, Vend in Powder River Basin.)

4.    Offshore drilling contractor SeaDrill Ltd. SDRL was recently awarded a contract by Statoil Brasil Óleo e Gas, a unit of integrated energy player Statoil ASA, for SeaDrill’s drillship, West Saturn, in the Statoil operated BM-S-8 license in Brazil’s prolific Santos basin.

Per the terms of the agreement, Statoil will deploy SeaDrill’s ultra deepwater drillship, West Saturn, to drill one exploration well in the Guanxuma prospect and up to seven wells where Statoil has license and operatorship, including the Peregrino oil field in the Campos Basin. Statoil may exercise the options based on the results of the exploration programs. Subject to satisfactory results and regulatory approvals, the Norwegian operator may hire West Saturn across its Brazilian assets including Peregrino oil field in the Campos Basin.

Even though oil has been trading in a bearish territory of late, many upstream companies are increasing their spending lately. This in turn led to a turnaround in the drillship activities. As evidence, Ensco plc secured contracts for three of its drillships few days back. In June Vantage Drilling Company and Noble Corporation also clinched drillship awards.

SeaDrill – currently carrying a Zacks Rank #1 (Strong Buy) – is poised to benefit from this uptick in drilling contracts. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. SeaDrill has a robust backlog of over $3.5 billion. The offshore driller's subsidiary – North Atlantic Drilling – has been securing a number of notable contracts lately including a contract for semi-submersible West Hercules to work in the UK. With the recent contract with Statoil, SeaDrill is likely to receive an additional backlog of $26 million, excluding the optional work for up to seven wells. Apart from generating a substantial amount of revenues, the contracts might be used to restructure negotiations with creditors. (Read more: SeaDrill Wins Exploration & Drilling Contract from Statoil.)

5.    Brazilian state-run integrated energy company Petrobras PBR saw its shares jump 4.9% to $8.44 Wednesday on heavy trading volume following certain positive announcements.

Brazil's securities industry watchdog CVM has overturned its preliminary verdict on Petrobras per which it was asked to reiterate its financial statements from the second and third quarters of 2013 to 2016. Banco Bradesco SA, the underwriter of Petrobras' 2010 offerings, was also relieved by the industry watchdog.

On the other hand, former Brazilian President Luiz Inacio Lula da Silva was charged with corruption and sentenced to an imprisonment term of nearly 10 years. Petrobras’ involvement in the multibillion dollar money laundering and bribery case along with years of mismanagement and low oil prices turned it into the world's most indebted oil company. Petrobras currently has a net debt of $94,993 million.

The state-run oil major stated that its board members have approved an initial public offering of shares of its fully-owned subsidiary Petrobras Distribuidora S.A. ("BR") on the Sao Paulo stock exchange, to decrease its debt and investment in low-return activities. The initial offering will be accomplished through a follow-on public offering. Petrobras expects the listing to be on the Novo Mercado segment, where corporate governance standards are high. This move will provide the company enough resources to concentrate on a trimmed portfolio. (Read more: Petrobras Stock Rises on Revised Regulatory Verdict.)

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

+0.68%

-6.28%

CVX

-0.22%

-10.12%

COP

-1.27%

-14.08%

OXY

+0.17%

-13.39%

SLB

+1.13%

-23.61%

RIG

0.00%

-45.36%

VLO

+1.75%

+1.02%

TSO

+3.26%

+18.88%

Over the course of last week, the Energy Select Sector SPDR – a popular way to track energy companies –  rose by +0.77%. The best performer was San Antonio-based energy explorer Tesoro Corp. TSO whose stock price was up +3.26%.

Longer-term, over the last 6 months, the sector tracker is down -12.52%. The major laggard during this period was offshore drilling powerhouse Transocean Ltd. RIG, experiencing a -45.36% price decline.

What’s Next in the Energy World?

Meanwhile, 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.

The 2017 Q2 earnings will also remain under scrutiny this week, with the oil services companies – providers of technical products and services to drillers of oil and gas wells – kicking off what is expected to be a good earnings season for U.S. energy firms.

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Petroleo Brasileiro S.A.- Petrobras (PBR): Free Stock Analysis Report
 
Tesoro Corporation (TSO): Free Stock Analysis Report
 
Royal Dutch Shell PLC (RDS.A): Free Stock Analysis Report
 
Transocean Ltd. (RIG): Free Stock Analysis Report
 
Seadrill Limited (SDRL): Free Stock Analysis Report
 
Halcon Resources Corporation (HK): Free Stock Analysis Report
 
Abraxas Petroleum Corporation (AXAS): Free Stock Analysis Report
 
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