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Oil & Gas Stock Roundup: Carrizo & Shell's Acquisitions, Conoco's Asset Sales & More

It was a week where both oil and gas prices registered gains.

On the news front, energy explorer Carrizo Oil & Gas Inc. CRZO and supermajor Royal Dutch Shell plc RDS.A announced purchase agreements, while large independent producer ConocoPhillips COP agreed to sell acreage in the Barnett shale field in Texas.      

Overall, the sector ended the second quarter on a positive note. West Texas Intermediate (WTI) crude futures added 7% to close at $46.04 per barrel, while natural gas prices rose 3.62% to $3.035 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Cheniere Starts Korea Gas Export, Jones Energy Sells Non-Core Assets.)

Oil prices staged a slight recovery from previous week’s 10-month lows, encouraged by the U.S. Energy Department's inventory release that showed a fall in domestic oil production. Per the most recent report, U.S. output decreased 100,000 barrels per day – the largest decline since July 2016. Some sector observers see the third decrease in the last 8 weeks as a sign of brake in shale oil production that continues to be the biggest headwind for the market.

Investors also rejoiced over a reduction in the U.S. rig count (number of rigs searching for oil and gas in the country) for the first time in 6 months – again pointing to a slowdown in shale output.

Meanwhile, natural gas also turned higher following a smaller-than-expected increase in weekly supplies.

Recap of the Week’s Most Important Stories

1.    Upstream energy company Carrizo Oil & Gas Inc. signed a purchase and sale agreement with ExL Petroleum Management, LLC -- a portfolio company of private equity and venture capital firm, Quantum Energy Partners -- to acquire Delaware Basin assets for $648 million in cash and potential contingent payments.

The acquisition of the assets is in line with the company's plan to increase its core position in Delaware Basin, one of the highest-return plays in North America.

Carrizo will receive 23,656 gross (16,488 net) acres after the acquisition, which is expected to close in mid-August, in Reeves and Ward counties. Net production from the asset is around 8,000 barrels of oil equivalent per day (BOE/d), of which 48% is oil. The company will get 11 operational wells and seven prospective wells. Although ExL is presently operating with four rigs in the area, Carrizo plans to start operations with three rigs after the acquisition.

The contingent payment requires Carrizo to pay ExL $50 million per year (maximum of $125 million) if U.S. oil averages more than $50 per barrel in any calendar year during period 2018-2021. (Read more: Carrizo Picks Up Delaware Basin Acreage for $648M.)

2.    One of the world's largest independent oil producer ConocoPhillips has decided to divest its stake in the Barnett Shale for a consideration of roughly $305 million plus net customary adjustments. The buyer of the asset is a unit of Miller Thomson & Partners, involved in the acquisition and development of natural gas resources. It is to be noted that proceeds from the sale will likely be utilized for ConocoPhillips’ general corporate activities.

The divestment reflects the company’s objective to lower its exposure to natural gas rich resources. During 2016, net production from the Barnett Shale was 11,000 barrels of oil equivalent per day (BOE/D). Of the total output, natural gas accounted for 55%, while natural gas liquids comprised 45%.

With the Barnett Shale transaction likely to close by the third quarter of 2017, the company’s 2017 production guidance is likely to get slashed by 5 thousand barrels of oil equivalent per day (MBOED). However, the company believes that there will not be any material impact on cashflows for this year following the divestment. (Read more: ConocoPhillips to Divest Barnett Shale Stake: Here's Why.)

3.    Shell Energy North America or SENA, a part of the integrated oil company Royal Dutch Shell plc recently signed a purchase agreement to acquire power and retail electric company, MP2 Energy. The acquisition – whose financial details have yet to be disclosed – is expected to be closed by the third quarter of 2017.

The Woodlands-based MP2 operates power plants and provides retail power to final consumers. Its operations also include commodity hedging, asset and risk management, execution of transactions, and delivering according to the precise needs of the clients. On the other hand, SENA's operations incorporate commercial and industrial retail energy management on the west coast of the US.

The deal will diversify Shell's business and help it to expand its electricity presence beyond the West Coast and spreading into Texas, the Midwest and the East Coast. Shell will be able to use MP2's network and self-developed proprietary systems and technology to supply market-based solutions to manage energy supply, load, and generation. In particular, the MP2 buy will help complement Shell’s transition away from oil and gas as part of its efforts to reduce operational carbon footprint. (Read more Shell to Expand Presence in Power Market with MP2 Buyout.)

4.    U.S.-based natural gas exporter Cheniere Energy Inc. LNG recently inked a deal to export liquefied natural gas to Lithuania's state-owned gas trader Lietuvos Duju Tiekimas. The company – currently carrying a Zacks Rank #1 (Strong Buy) –expects to deliver the first U.S. LNG cargo by the second half of August. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

This is the first LNG import deal that Lithuania signed with the U.S., adding to the long list of buyers of U.S.’s LNG supply. With the energy production boom in U.S., the nation is likely to become the world’s largest LNG supplier by 2035, transcending Australia and Qatar.

With domestic prices remaining constrained due to abundant supplies, Cheniere Energy sees a big opportunity in selling U.S. natural gas production at higher prices overseas. Interestingly, the company is the only LNG exporter of the U.S. and plans to turn the natural gas glut into export revolution. Cheniere Energy commenced its LNG cargo exports in early 2016 and currently exports natural gas to around 20 countries including Latin America, Europe, Asia, Middle East, Japan, Korea, India and others. (Read more: Cheniere Energy Inks LNG Export Deal with Lithuania.)

5.    Offshore drilling contractor SeaDrill Ltd. SDRL recently extended the revolving credit facility granted to its subsidiary North Atlantic Drilling Ltd by adding $100 million to the short-term loan under the facility.

The credit arrangement was created on Jan 31 to lend $25 million to the North Atlantic Drilling unit. The maturity period of the original arrangement was for three months. However, on Apr 25, the facility was again amended to increase the credit amount to $50 million and maturity period was also extended till Jun 30.The recent amendment has increased the loan amount to $150 million and pushed back the maturity date from Jun 30 to Jul 31.

SeaDrill, being one of the worst sufferers of the industry downturn, carries the heaviest debt burden in the oil rig industry. The company is grappling with $14 billion debt.

The company has been contemplating restructuring under bankruptcy for quite some time now and is in advanced talks with the lenders. The company expects to conclude the negations with the creditors by the end of June. However, with the one-month extension in the credit facility provided to North Atlantic Drilling, investors can expect that the company will release its restructuring plans by the end of next month. (Read more: SeaDrill Extends Credit Facility for North Atlantic Drilling.)

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

-1.08%

-6.96%

CVX

-0.24%

-7.99%

COP

-3.17%

-9.63%

OXY

-0.22%

-12.20%

SLB

+0.81%

-20.56%

RIG

+5.06%

-43.88%

VLO

+2.99%

+2.32%

TSO

+2.96%

+12.29%

 

Over the course of last week, the Energy Select Sector SPDR – a popular way to track energy companies – rose by 1.40%. The best performer was offshore drilling powerhouse Transocean Ltd. RIG whose stock price jumped 5.06%.

Longer-term, over the last 6 months, the sector tracker is down 11.82%. Ironically, it was again Transocean, which was the major laggard during this period, experiencing a 43.88% price decline.

What’s Next in the Energy World?

In this holiday-shortened week, market participants will be closely tracking the regular releases i.e. the U.S. government statistics on oil and natural gas. Energy traders will also be focusing on the Baker Hughes data on rig count.

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Royal Dutch Shell PLC (RDS.A): Free Stock Analysis Report
 
Transocean Ltd. (RIG): Free Stock Analysis Report
 
Seadrill Limited (SDRL): Free Stock Analysis Report
 
Cheniere Energy, Inc. (LNG): Free Stock Analysis Report
 
Carrizo Oil & Gas, Inc. (CRZO): Free Stock Analysis Report
 
ConocoPhillips (COP): Free Stock Analysis Report
 
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