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Oil & Gas Stock Roundup: Shell's Olefins Unit Start-Up, SemGroup's JV & More

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

On the news front, Royal Dutch Shell plc RDS.A started up its fourth linear alpha olefins unit at its chemicals plant in Geismar, LA, while SemGroup Corp. SEMG and KKR teamed up for the development of a Canadian midstream infrastructure platform.

Overall, it was a good week for the sector. West Texas Intermediate (WTI) crude futures rose 7.6% to close at $51.59 per barrel, while natural gas prices gained some 1.8% to $3.099 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Elliott's QEP Bid, Transocean's Contract Win & More)

The U.S. crude benchmark scored a second straight weekly gain, driven by Saudi Arabia’s promise to lower its oil exports, while it also drew support from the OPEC+ production cut agreement. Continued optimism surrounding talks between the United States and China to resolve the trade war and easing fears of a possible economic slowdown also boosted prices. Data showing drillers in the United States cutting oil rigs for second consecutive week brought further upside

Meanwhile, natural gas prices also registered a weekly climb following an above-consensus decrease in supplies. Investors were also buoyed by forecasts of colder weather, which should lead to the heating fuel’s tepid demand.

Recap of the Week’s Most Important Stories

1.    Royal Dutch Shell recently finished construction and commenced production from its fourth alpha olefins unit at the company’s chemical facility located in Geismar, LA. This expansion added annual production capacity of 425,000 metric tons to the Geismar site. With this development, the total alpha olefin production capacity at the facility is ramped up to more than 1.3 million metric tons per annum, making it the largest alpha olefins producing site.

Construction started at the site in 2016 and operations began in December 2018. The alpha olefins unit is part of Shell’s key growth projects for global chemicals business. The demand for chemicals is expected to remain high for a long term as these are used in many daily-use products like hand soap, laundry detergents, lubricants, motor oils and others.

The start-up of the new unit is in line with the company’s intention to integrate downstream business. Notably, Shell owns manufacturing sites — which will supply ethylene feedstock to the Geismar plant — in Norco, LA, and Deer Park, TX. It had to sell much of its U.S. ethylene production, which can now be used in the new alpha olefins unit. With global demand for polyethylene products on the rise, the integration will enable the company to benefit from this trend. (Read more Shell Brings New Alpha Olefins Unit in Geismar Online)

2.    SemGroup and U.S. private equity company KKR recently entered into a joint venture (JV) for the development of a Canadian midstream infrastructure platform. The new venture named ‘SemCAMS Midstream ULC’ has signed an agreement to snap up Meritage Midstream ULC and its infrastructure assets for $449 million.

Tulsa-based midstream player SemGroup will be contributing all the assets and shares of its SemCAMS unit (which is valued at $860 million) in exchange for 51% ownership in the JV, along with $460 million of cash proceeds. KKR will contribute $385 million for a 49% stake in common equity. Further, it will contribute another $224 million for the ownership of perpetual preferred equity. The transaction is set for closure in the first quarter of 2019.

The assets to be acquired include a portfolio of 195 million cubic feet per day (MMcf/d) of natural gas processing capacity along with 200 MMcf/d gas processing expansion, which is presently under construction. The assets also comprise 101 miles of gas gathering pipelines, 38 miles of oil gathering pipelines, along with 18 miles of emulsion and gas lift pipelines in the Montney play. (Read more SemGroup & KKR Team Up for Meritage Midstream Buyout)

3.    Nabors Industries Ltd. NBR recently announced that it is looking to significantly reduce its debt burden by various means. The company claims to have lowered net debt by around $230 million in the fourth quarter of 2018 and aims to reduce it by another $200-$250 million in 2019.

Nabors is planning to restrict its 2019 capital spending at $400 million versus expected capital expenditure of $500 million in 2018. The Zacks Rank #3 (Hold) company intends to reduce its General & administrative (G&A) as well as Research & Engineering (R&E) costs by 10% in 2019 from 2018 levels.

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

Finally, starting from the second quarter of 2019, Nabors is planning to reduce its quarterly cash dividend payment by 83% to a penny per share (leading to four cents per share on an annualized basis). (Read more Nabors to Cut Costs, Dividend & Capex to Reduce Debt)

4.    TechnipFMC plc FTI recently received an integrated engineering, procurement, construction and installation (iEPCI) contract from British oil giant BP plc BP for the development of the Atlantis Phase 3 project in the Gulf of Mexico (GoM).

BP greenlighted the Atlantis Phase 3 development, which has an estimated cost of $1.3 billion. This move was in sync with its strategy of growing advantaged oil production through existing production facilities in the GoM. Atlantis Phase 3, estimated to be commissioned in 2020, will comprise the construction of a new subsea production system from eight new wells that will be tied into the current platform, 150 miles south of New Orleans. At its peak, the project is anticipated to enhance production at the platform by 38,000 barrels of oil equivalent a day.

Per the contract, TechnipFTI will construct, deliver and install subsea equipment including subsea tree systems, umbilicals and subsea tree jumpers, manifolds, flowline, pipeline end terminations, subsea distribution as well as topside control machinery. Markedly, the estimated value of the contract is likely to be in the band of $75-$250 million. (Read more TechnipFMC Secures Contract From BP for Atlantis GoM Project)

5.    Rowan Companies plc’s RDC N-Class ultra-harsh environment jack-up rig, Rowan Norway, has been contracted by ConocoPhillips for operations in Norway. The duration of the contract is estimated at seven months. Subject to partner approval, the contract is anticipated to begin in the second quarter of 2019.

Subsequent to the initial contract term, ConocoPhillips has two options. Per the first option, the company can operate the rig for an estimated duration of five months. Per the second option, ConocoPhillips can use the rig for an estimated duration of nine months. Currently, the Rowan Norway is working with Turkish Petroleum in the Mediterranean Sea. The contract is valid until about April 2019.

Since December 2018, Rowan has announced few contracts and extensions for rigs that include Rowan Gorilla VI, Ralph Coffman and Joe Douglas. These contracts act as a cushion to the commodity price volatility. (Read more Rowan Receives Contract for Jack-up Rig From Conoco)

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

+0.8%

-13.2%

CVX

+1.6%

-9.2%

COP

+4.1%

-6.6%

OXY

+4.8%

-20.7%

SLB

+6.8%

-38.1%

RIG

+8.3%

-33.8%

VLO

+1.9%

-25.6%

MPC

+5.2%

-9.2%

In line with the week’s bullish oil market sentiment, the Energy Select Sector SPDR – a popular way to track energy companies – generated a +3.6% return last week. The best performer was offshore driller Transocean RIG whose stock jumped 8.3%.  

Longer-term, over six months, the sector tracker is down 17.9%. Oilfield service biggie Schlumberger was the major loser during this period, experiencing a 38.1% price decline.

What’s Next in the Energy World?

In this week, 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 and monthly reports from the EIA, OPEC and the IEA, while the 2018 Q4 reporting season gets under way later this week.

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