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Oil & Gas Stock Roundup: DOJ Plans to Block Halliburton Deal, NOV Slashes Dividend

It was a week where oil futures moved closer to the $40 mark and natural gas continued its rebound off 17-year lows.

On the news front, the $35 billion merger between oil services groups Halliburton Co. HAL and Baker Hughes Inc. looks to be in danger after the U.S. Justice Department filed a lawsuit against the merger, while National Oilwell Varco Inc. NOV slashed its dividend by 89%.

Overall, it was a good week for the sector. West Texas Intermediate (WTI) crude futures rallied 7.4% to close at $39.72 per barrel, while natural gas prices gained 1.8% to $1.990 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Schlumberger Buys Cameron, BP to Pay $20B Oil Spill Fine.)

Oil prices moved north after the U.S. Energy Department's latest inventory release showed that crude stockpiles recorded a surprise fall from their all-time high levels. Things were further helped by the Baker Hughes report that showed another drop in oil-directed rigs – indicating a break in shale drilling activities. A weak U.S. dollar and hopes that major producers might agree to an output freeze when they meet on Apr 17 also propped up the commodity.

Natural gas also fared well following an in-line inventory report. The fuel was further buoyed by predictions of solid demand for the fuel with cool weather expected through the end of this month.

Recap of the Week’s Most Important Stories

1.    As speculated, the Department of Justice (DOJ) has finally filed a civil antitrust lawsuit in an attempt to block the $35 billion merger between Halliburton Co. and Baker Hughes.

The regulators are of the opinion that if Halliburton merges with Baker Hughes then the oilfield service industry will be dominated by the combined company and Schlumberger Ltd., the largest player. The primary threats to the market include elimination of competition and increasing prices. The merger might also impede the innovations in the industry.  

As disclosed by DOJ, Halliburton is not willing to sell sufficient assets to clear regulatory activities. The justice department added that if Halliburton and Baker Hughes merge, the combined firm might eradicate competition for 23 services or products. (See More: Halliburton-Baker Hughes $35 Billion Deal Opposed by DOJ.)

2.    Energy equipment maker National Oilwell Varco Inc. declared that it will slash its quarterly dividend in an unfavorable business scenario following the prolonged weakness in oil prices. Management also predicts revenues for the first quarter to fall sequentially.

National Oilwell has declared quarterly dividend of 5 cents per share, more than 89% lower than the prior dividend of 46 cents. Along with this, the company’s first-quarter revenues will likely witness a 20% sequential decline and a 55% year-over-year fall.

Management revealed that although the business outlook in the near term might not be favorable, total debt is anticipated to decline more than $500 million in the first quarter. Most importantly, the intention of National Oilwell to slash dividend will likely boost its future cash flows by $615 million every year.

3.    Leading upstream energy player Marathon Oil Corp. MRO has inked deals to sell some of its non-core assets for $950 million. The strategic move should help the company trim its debt load, address leverage issues and improve the health of its balance sheet.

Marathon Oil intends to divest all of its Wyoming upstream and midstream assets for $870 million. Notably, this is the largest of all the deals signed by the company. The properties to be divested in the upstream segment include waterflood developments in the Big Horn and Wind River basins and the Red Butte pipeline. The sale was initiated in Jan, 2016 and is expected to close by the middle of the year.

The company has also entered into separate agreements to sell natural gas assets in the Piceance basin in Colorado, undeveloped acreage in West Texas and a 10% interest in the outside-operated Shenandoah discovery in the Gulf of Mexico. The combined value of the asset sales is estimated around $80 million.

4.    U.S. energy major Chevron Corp. CVX announced that it is reducing its workforce by 655 in the Houston region amid low oil prices. This is in sync with the company’s late last year’s announcement of a significant headcount reduction plan from its upstream business.

This year, the company plans to cut 4,000 jobs, which is higher than last year’s 3,000 headcount reduction. This is quite alarming as the total 7,000 jobs cut comes to almost 10% of 2014’s total work force. Investors should know that this year’s workforce reduction program is part of Chevron’s 24% capital expenditure reduction program for 2016. (See More: Chevron Cuts Houston Headcount by 655 Amid Low Oil Prices.)

5.    Natural gas producer Chesapeake Energy Corp. CHK announced that it has modified its $4 billion secured revolving credit facility agreement with its bank syndicate group. The agreement will mature in 2019. Also, maintaining the current availability, the borrowing limit was reiterated at $4 billion. Notably, under the Credit Agreement, Chesapeake had to pledge additional assets as collateral for the redetermination.

Additionally, the next scheduled redetermination of borrowing base has been deferred as a condition of the amendment. The lenders have agreed not to exercise their interim redetermination right, in each case until Jun 2017. The amendment comprises of a collateral value coverage test, which may limit Chesapeake's borrowing capacity if its collateral coverage ratio is below 1.25x, tested as of Mar 31, 2017.

Price Performance

The following table shows the price movement of the major oil and gas players over the past week and during the last 6 months.

Company

Last Week

Last 6 Months

XOM

+0.85%

+5.07%

CVX

+2.27%

+7.32%

COP

+6.05%

-25.47%

OXY

+5.05%

-3.08%

SLB

+2.89%

-1.41%

RIG

+4.85%

-43.47%

VLO

-3.59%

-5.83%

TSO

-1.77%

-20.68%

Over the course of last week, ‘The Energy Select Sector SPDR’ was up 2.48% after a bullish EIA report. Consequently, investors witnessed a buying spree in most large companies. The best performer was Houston-based energy major ConocoPhillips COP that added 6.05% to its stock price.

But longer-term, over the last 6 months, the sector tracker is down 9.91%. Offshore drilling giant Transocean Ltd. RIG was the main casualty during this period, experiencing a 43.47% price decrease.

What’s Next in the Energy World?

Apart from the usual releases in this week – the U.S. government data on oil and natural gas – market participants will be closely tracking a series of top-tier economic readings, including those on retail sales, business inventories, inflation and industrial production. And again, it is likely that oil prices (and especially the outcome of meeting of oil producers in Doha on Apr 17) will continue to determine the fate of stocks in the days ahead.

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NATL OILWELL VR (NOV): Free Stock Analysis Report
 
HALLIBURTON CO (HAL): Free Stock Analysis Report
 
CHEVRON CORP (CVX): Free Stock Analysis Report
 
TRANSOCEAN LTD (RIG): Free Stock Analysis Report
 
CHESAPEAKE ENGY (CHK): Free Stock Analysis Report
 
CONOCOPHILLIPS (COP): Free Stock Analysis Report
 
MARATHON OIL CP (MRO): Free Stock Analysis Report
 
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