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Oil & Gas Stock Roundup: C&J Energy-Keane Merger, Phillips 66 JVs & More

It was a week where oil prices hit its lowest in five months. Meanwhile, natural gas futures erased some of the steep losses that have taken the commodity to lows not seen since June 2016.

On the news front, oilfield service providers C&J Energy Services CJ and Keane Group Inc. FRAC have agreed to merge in an all-stock deal worth $746 million, while diversified energy company Phillips 66 PSX unveiled plans to form two pipeline project joint ventures for crudfe oil transportation.

Overall, it was a mixed week for the sector. While West Texas Intermediate (WTI) crude futures fell 2.7% to close at $52.51 per barrel, natural gas prices moved up 2.1% for the week to finish at $2.387 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Comstock's Acquisition, Shell's Strategy Update & More)

The U.S. crude benchmark hit the lowest settlement level since January following the U.S. Energy Department's latest inventory release. The report showed that crude stockpiles recorded a much bigger-than-anticipated weekly build, ballooning to their highest since July 2017. On a further bearish note, the report revealed that gasoline inventory increased from its previous week level.

Analysts and industry watchers are also worried over signs of worsening oil demand growth as the U.S.-China trade spat continue to threaten a major slowdown in global economy.

On the other hand, natural gas prices recovered from previous week’s sharp retreat after a government report showed a smaller-than-expected increase in supplies. However, the commodity remained close to the lowest levels in three years because of growing fears that soaring production is outpacing demand growth

Recap of the Week’s Most Important Stories

1.  In a bid to improve pricing power in the oilfield service space, C&J Energy Servicesand Keane Group Inc. have announced a merger agreement. Energy investors are overwhelmed with the announcement as reflected by the C&J Energy and Keane stock jump of roughly 20% and 7%, respectively, on Jun 17.

The combination will create a diversified and leading oilfield services company. The combined firm, where each of C&J Energy and Keane will have 50% ownership, will have a pro-forma enterprise value of $1.8 billion, added C&J Energy and Keane. The all-stock agreement is likely to consummate by the December quarter of 2019 and companies expect the deal to prove immediately accretive to cashflow.

Following cheaper rates and intense competition in the oilfield service space, companies are looking for mergers and consolidations to expand market share and improve pricing power. Synergies from mergers will enable oilfield service companies improve operational efficiency and lower capital spending requirements, per an analyst quote. (Read more Can Consolidation Help Revive Oilfield Service Stocks?)

2.   Phillips 66 recently announced that it has formed separate joint ventures (JVs) with Bridger Pipeline LLC and Plains All American Pipelineto create two pipelines in key shale plays.

Phillips 66 formed a 50-50 JV with Bridger Pipeline LLC, namely Liberty Pipeline LLC, which will build the 24-inch Liberty Pipeline. The pipeline is designed to provide crude oil shipping services from shale production sites in the Rockies and Bakken regions to Cushing, OK. The Liberty Pipeline, which is backed by long-term volume commitments, is expected to help producers or clients to reach several Gulf Coast markets in Corpus Christi, Ingleside and Houston, TX. The pipeline is expected to come online in first-quarter 2021.

The midstream giant also created a 50-50 JV with Plains All American, namely Red Oak Pipeline LLC, to build the Red Oak Pipeline system. This pipeline will connect producers in Cushing and the Permian Basin with the markets in Corpus Christi, Ingleside, Houston, and Beaumont of Texas. Given dearth of takeaway capacity haunting producers in the Permian Basin for the last few quarters, the Red Oak Pipeline system is expected to serve as an oasis.(Read more Phillips 66 Creates 2 JVs for Liberty & Red Oak Pipelines)

3.  Canadian energy player Encana Corporation ECA recently provided an update on second-quarter-to-date production, underscoring strength of operations.

The Zacks Rank #2 (Buy) company expects second-quarter output within 585-595 thousand barrels of oil equivalent per day (MBOE/d), higher than 338 MBOE/d and 566.6 MBOE/d recorded in the year-ago period and the last reported quarter, respectively. Encana expects liquids to account for 54% of the total output in the second quarter.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Canadian energy behemoth reiterated its 2019 capex and output guidance. The company expects capital spending in the band of $2.7-$2.9 billion. Full-year production is anticipated within 560-600 MBOE/d.(Read more Encana to Gain From Output Growth, Maintains 2019 View)

4.   Royal Dutch Shell plc RDS.A recently shipped its first liquified natural gas (LNG) cargo from the Prelude floating liquefied natural gas (FLNG) facility in Australia. The startup of one of the world’s most anticipated LNG projects marks a milestone for the European energy giant. Notably, the flagship project is a joint venture among Shell, Inpex Corporation, Korea Gas Corporation and Taiwan’s CPC Corporation, with Shell being the chief operator, owning a 67.5% stake.

The Prelude project will further bolster Australia’s LNG exports, which overtook Qatar as the largest LNG exporting country in 2018. Prelude, on becoming fully functional, will aid Australia in retaining its current position as the world’s largest LNG exporter. Australia’s LNG export is likely to total 80 million metric tons per year.

Prelude will handle production, liquefaction, storage and transfer of LNG at sea, along with processing, exporting and condensation of liquefied petroleum gas. The facility has a production capacity of around 5.3 million tons per annum (mtpa) of liquids, with LNG accounting for 3.6 mtpa or 68% of the total capacity. Markedly, Shell dispatched its first NGL cargo from Prelude in March 2019.(Read more Shell Ships 1st LNG From Prelude, To Sell Martinez Refinery)

5.    Scarred by corruption scandal and huge debt burden, Petrobras PBR has been making serious efforts to trim its leverage metrics and boost overall performance. Reportedly, the Brazilian oil giant boosted investment and divestment targets of the five-year plan for the 2019-2023 period, unveiled in December 2018, before Roberto Castello Branco became the CEO from Jan 1, 2019.

The company now plans to invest $105 billion within 2019-2023 versus previous forecast of $84.1 billion. This represents a 41% hike from its projected investment of $74.5 billion through 2018-2022.

Petrobras now aims to raise $35 billion through asset sales within the 2019-2023-time frame versus prior forecast of $26.9 billion. The news comes just a week after the Supreme Court lifted the suspension order on the company that put a pause on its asset divestiture program including the $8.6 billion worth TAG pipeline sale. Marking a major victory for the Bolsonaro government and Petrobras, the court recently ruled that state-held companies do not require congressional approval to jettison their subsidiaries.(Read more Petrobras Ups 5-Year Investment & Divestment Targets)

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

-0.3%

+4.3%

CVX

-0.6%

+10.6%

COP

-0.2%

-4.7%

OXY

+3.1%

-21.1%

SLB

+0.9%

-3.1%

RIG

-11%

-22%

VLO

+2.7%

+8.3%

MPC

+2.1%

-17.4%

 

Reflecting the weak market sentiment, the Energy Select Sector SPDR – a popular way to track energy companies – edged down 0.4% last week. The worst performer was offshore driller Transocean Ltd. whose stock slumped 11%.

But longer-term, over six months, the sector tracker is up 3.4%. Integrated energy major Chevron CVX was the major gainer during this period, experiencing a 10.6% price increase.

What’s Next in the Energy World?

As usual, 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.

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Petroleo Brasileiro S.A.- Petrobras (PBR): Free Stock Analysis Report
 
Phillips 66 (PSX): Free Stock Analysis Report
 
Encana Corporation (ECA): Free Stock Analysis Report
 
Chevron Corporation (CVX): Free Stock Analysis Report
 
Royal Dutch Shell PLC (RDS.A): Free Stock Analysis Report
 
Keane Group, Inc. (FRAC): Free Stock Analysis Report
 
C&J Energy Services, Inc. (CJ): Free Stock Analysis Report
 
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