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Oil & Gas Stock Roundup: Shell's Oil Sands Sale, Chevron's Production Start-Up and More

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It was a week where oil prices broke below $50-a-barrel but natural gas futures settled above the psychologically important $3 threshold. 

On the news front, integrated major Royal Dutch Shell plc agreed to offload bulk of its oil sands interests in Canada for $7.25 billion, while U.S. oil major Chevron Corp. (CVX - Free Report) and partners commenced production at the Mafumeira Sul development offshore Angola.

Overall, it was another mixed week for the sector. While West Texas Intermediate (WTI) crude futures dived 9.1% to close at $48.49 per barrel, natural gas prices rose 6.4% to $3.008 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Exxon's $20B Investment, BP's Strategy Update and More.)

While we cheer the U.S. bull market’s 8-year anniversary, oil prices tumbled to their lowest levels of 2017 after the U.S. Energy Department's weekly inventory release showed record high inventories and rise in production.

The federal government’s Energy Information Administration (‘EIA’) report revealed that crude inventories jumped by 8.21 million barrels for the week ending Mar 3, 2017. A spike in the level of imports and production – now at a 1-year peak – led to the massive stockpile build with the world's biggest oil consumer.

The ballooning U.S. oil production and supplies are starting to undermine the OPEC members’ surprisingly high level of compliance with the landmark production cut agreement signed late last year.

The commodity was also weighed down by data from Baker Hughes indicating another rise in the domestic oil rig count and pointing to the resurgence in shale drilling activities. 

Oils-Energy Sector 5 YR % Return

Oils-Energy Sector 5YR % Return

Meanwhile, natural gas turned sharply higher following a larger-than-expected decrease in supplies and predictions of below-normal temperatures over the next few days that could boost the fuel’s demand.

Recap of the Week’s Most Important Stories

1.    Anglo Dutch oil giant Royal Dutch Shell plc announced its intention to offload majority of its Canadian oil sands acreage in a deal of net worth $7.25 billion. Per the deal, the company would divest all its oil sands interests, apart from the 10% stake in the Athabasca mining project, to Calgary-based upstream player Canadian Natural Resources Ltd. (CNQ - Free Report) . The transaction is scheduled for closure in mid-2017, subject to regulatory approvals.

The deal takes the $30 billion divestment program of Shell another step forward as the company has achieved two thirds of its divestment target with this latest contract. Shell had sold assets worth $5 billion last year and $14.7 billion this year that includes the Canadian assets share program. Shell currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The deal provides the company a major uplift in its drive to decrease the debt following the acquisition of BG Group for $47 billion. The exit from the Canadian oil sands assets is expected to enhance Shell’s cash flow and returns on capital. The move is also in sync with the company's aim to upgrade and streamline its portfolio. (Read more: Shell Divests Canadian Oil Sands Assets for $7.25B.)

2.    U.S. energy giant Chevron Corp. announced that its subsidiary, Cabinda Gulf Oil Company, has begun oil and gas production at its Mafumeira Sul Project offshore Angola. Cabinda Gulf, the operator of the project, owns 39.2% stake. Angolan state oil major Sonangol holds 41% interest whereas European oil biggies TOTAL SA and Eni SpA hold 10% and 9.8% interests respectively.

This production commencement is in sync with the company’s 2017 objective of speeding up the completion of projects under construction and enhancing the free cash flow. The output from the project will lead to value addition for Angola, Chevron and its partners.

Mafumeira Sul, located 15 miles from Angolan coast and under 200 feet of water, is the second development stage of the Mafumeira Field.  Its estimated daily production includes 150,000 barrels of natural gas liquids and 350 million cubic feet of natural gas. Production is expected to be gradually ramped up to full capacity by next year. (Read more: Chevron Starts Production at Mafumeira Sul Project.)

3.    World’s largest publicly listed energy producer ExxonMobil Corp. (XOM - Free Report) and Italy’s Eni SpA inked a purchase and sale agreement, per which the former will purchase an indirect stake of 25% from the latter in the natural gas-rich Area 4 block, offshore Mozambique.

Currently, Eni has 50% indirect interest in the block through a 71.4% stake in Eni East Africa, which holds 70% of the Area 4 concession. Per the agreed terms, the transaction includes a cash price of about $2.8 billion. 

On closure of the transaction, Eni will continue to head the Coral floating LNG project and all upstream operations in Area 4. The construction and operation of natural gas liquefaction facilities onshore, on the other hand, will be led by ExxonMobil. This operating model will ensure the use of best practices and skills of Eni and ExxonMobil as each company will be focusing on separate and clearly defined scopes alongside maintaining the advantages of a fully integrated project. (Read more: ExxonMobil to Purchase 25% Stake from Eni in Area 4 Block.)

4.    In order to focus on more profitable resources, energy major Marathon Oil Corp. (MRO - Free Report) announced its decision to rebalance its portfolio by selling its Canadian oil sands business and acquiring acres of land from Permian Basin.

As part of the announcement, Marathon Oil declared its intention to divest its Canadian affiliate to Royal Dutch Shell plc and Canadian Natural Resources Ltd. for a cash consideration of $2.5 billion. The agreement is expected to complete by mid-2017.

Alongside selling Canadian properties, Marathon Oil intends to acquire 70,000 net acres of area from the Permian basin from BC Operating Inc. and other entities. The value of the deal, which is likely to be closed by the second quarter 2017, is $1.1 billion in cash.

Management believes that the divestment of properties in Canada at such an attractive price as well as the company’s growing exposure to the lucrative U.S. resource plays will boost its prospects. In fact, the agreements have positioned the company to generate significant cashflows over the long term. (Read more: Marathon Oil Sells Canadian Properties, Buys Permian Assets.)

5.    Oil and gas finder Anadarko Petroleum Corp. unveiled 2017 guidance and initial capital expenditures for the year, which is primarily focused toward domestic operations. Of the company’s planned capital expenditure in the range of $4.5-$4.7 billion, nearly 80% will be allocated towards the U.S. onshore upstream and midstream activities, and expanded position in the Deepwater Gulf of Mexico.

The company aims to increase oil sales volume by nearly 25% in 2017 from 2016 levels and improve margins significantly backed by higher mix of oil in the total production mix. Anadarko Petroleum aims to increase Wolfcamp A (Delaware Basin) net resources by 50% to more than 3 billion barrels of oil equivalents (BOE) in 2017 and also raise DJ Basin development area net resources by 33% to more than 2 billion BOE in 2017.

These investments provide the foundation and also pave the way for Anadarko Petroleum to achieve its five-year oil growth expectations of more than 15% on a compounded annual basis at current prices. Delaware and DJ Basin assets of the company are going to be primary catalysts.

In addition to focusing on onshore domestic operations, Anadarko Petroleum is also working to boost Deepwater Gulf of Mexico as well as Algeria and Ghana by investing nearly $1.1 billion in 2017. (Read more: Anadarko Unveils 2017 Guidance, Focus on US to Boost Results.)

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

-1.91%

-4.81%

CVX

-2.83%

+7.90%

COP

-7.68%

+12.27%

OXY

-5.38%

-12.77%

SLB

-3.97%

+2.06%

RIG

-13.08%

+33.87%

VLO

-1.73%

+20.02%

TSO

-3.79%

+2.26%

Over the course of last week, ‘The Energy Select Sector SPDR’ fell by 3.7%. Consequently, investors witnessed selling in most market heavyweights. The worst performer was offshore contract drilling behemoth Transocean Ltd. (RIG - Free Report) whose stock price fell 13.1%.

But longer-term, over the last 6 months, the sector tracker is up 1.20%. Ironically, it was again Transocean, which was one of the major beneficiaries during this period, experiencing a 33.9% price increase.

What’s Next in the Energy World?

With the Q4 earnings season over, market participants will again be glued to the regular releases i.e. the U.S. government data on oil and natural gas. Energy traders will also be focusing on the Baker Hughes data on rig count.

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