Oil & Gas Stock Roundup: Shell Snaps Up BG for $70B - Analyst Blog

Overall, it was a mixed week for the sector. While resurgent West Texas Intermediate (WTI) crude futures climbed 5.1% to close at $51.64 per barrel, natural gas prices fell around 7.5% to $2.51 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Transocean to Scrap More Rigs, Kinder Morgan to Build Crude Storage.)

Oil prices gained for the fourth week in a row, encouraged by the Baker Hughes report that showed another massive record drop in oil-directed rigs, indicating a brake in shale drilling activities. This is seen as a precursor to a slowdown in oil production leading to a subsequent drop in the commodity’s bloated supply level.

Doubts over a potential Iranian nuclear deal added to the optimism. Moreover, market experts think that even if such an agreement takes place eventually, a ramp-up in exports from Iran could be months away.

Natural gas fared badly, however, hitting the lowest level since June 2012 as it was weighed down by an above-average supply injection and expectations of tepid heating demand with the imminent arrival of soft spring temperature.

Recap of the Week’s Most Important Stories

1.    Integrated energy major Royal Dutch Shell plc announced that it has entered into a deal with BG Group plc. Per the agreement, Shell is expected to acquire the leading upstream energy player in UK for a total consideration of $70 billion – including both cash and equity payments. This is the biggest merger among energy firms in a decade.

Many analysts are anticipating that the total value of the combined company will be more than $296 billion. Hence, with the transaction, Shell – currently with market capitalization of $195 billion – will get closer to the world’s largest publicly traded oil company, Exxon Mobil Corp., which is currently valued at $360 billion. (See More: Will Shell Benefit from $70B Merger Deal with BG Group?)

2.    Oilfield service behemoth Halliburton Co. HAL has found three businesses to dispose as part of its mega-merger deal with Baker Hughes. Halliburton had been asked by the U.S. Department of Justice to sell some of the overlapping business units as a prerequisite for the merger.

The company has selected its Fixed Cutter and Roller Cone Drill Bits, Directional Drilling and Logging-While-Drilling/Measurement-While-Drilling businesses for sale. Halliburton further stated that the sale would not be finalized until final approval has been received for the Baker Hughes merger, expected by the second half of 2015. (See More: Halliburton to Sell 3 Businesses for Baker Hughes Deal)

3.    U.S. energy firm Apache Corp. APA announced plans to exit its upstream Australian operations. The company added that it would sell its affiliate – Apache Energy Limited – to a group of private equity funds managed by Macquarie Capital Group Limited and Brookfield Asset Management Inc. Apache would receive $2.1 billion in cash for the deal.

With this sale, Apache will exit all its exploration and production business in Australia. Earlier this month, this company announced the sale of its Wheatstone LNG project for $2.8 billion to Woodside Petroleum Limited. The company now retains just a 49% stake in fertilizer producer Yara Pilbara Holdings Pty Limited. (See More: Apache to Divest Australian Upstream Operations for $2.1B)

4.    Houston-based independent exploration and production company ConocoPhillips COP gave a detailed outline of its financial priorities and operating plan at its Analyst and Investor Meeting that was recently held in New York.

By the end of 2016 ConocoPhillips expects to lower operating costs by $1 billion from that in 2014. The company also gave details of a three-year investment plan, wherein capital expenses will be about $11.5 billion annually.

Finally, ConocoPhillips expects 2015 volume to grow by 2–3% and hopes to reach 1.7 million barrels of oil equivalent per day by 2017. The production growth during this period is expected from the company’s Asia Pacific and Middle East, Canada and Lower 48 segments. (See More: ConocoPhillips' Long-Term Operational and Investment Plans)

5.    Energy-focused engineering and construction firm McDermott International Inc. MDR declared that it got a subsea umbilicals, risers & flowlines (SURF) contract from upstream energy firm Queiroz Galvão Exploração e Produção S.A. (QGEP) in Brazil.

Per the agreement, McDermott will likely work on the engineering and installation of subsea hardware – comprising flexible pipes, umbilical termination assemblies, umbilicals, suction piles, subsea pump skids and related machineries − for the development of the Atlanta early production system (EPS) in Santos Basin located off the coast of Brazil. (See More: McDermott International Gets SURF Contract from Brazil Firm)

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

+0.49%

-6.05%

CVX

-0.32%

-4.94%

COP

+1.56%

-2.54%

OXY

+1.86%

-7.84%

SLB

+2.90%

-3.20%

RIG

+0.37%

-43.43%

VLO

-3.70%

+28.98%

TSO

-5.49%

+35.98%

The world’s largest oilfield services provider Schlumberger Ltd. SLB rode the oil price resurgence and was the week's best performer among the market heavyweights, adding 2.9% to its stock price. The biggest loser was downstream operator Tesoro Corp. TSO which fell 5.5%. With refiners being buyers of crude, a strengthening commodity price has triggered fears for weaker margins.

But over the last 6 months, Tesoro has been the chief beneficiary on the bourses with its shares advancing 36%. Investors have rewarded the company for its continued focus on shareholder returns. Meanwhile, offshore contract driller Transocean Ltd. was the laggard, as it witnessed a 43.4% price decline over the same time frame on the back of rig oversupply that has led the industry into a cyclical downturn.

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 crucial economic reports, including those on retail sales, industrial production and housing.

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