Oil & Gas Stock Roundup: Shell To Invest $10B In Brazil, Chevron Starts Angola Project

It was a week where both oil and gas prices finished sharply lower.

On the news front, European supermajor Royal Dutch Shell (LON:RDSa) plc RDS.A pledged to invest $10 billion in Brazil over a five-year span, while U.S. biggie Chevron Corp. (NYSE:CVX) and partners commenced production at the Mafumeira Sul development offshore Angola.

Overall, it was another dismal week for the sector. West Texas Intermediate (WTI) crude futures dived 5.4% to close at $43.41 per barrel, while natural gas prices ended down 5.3% to $2.619 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: EOG, Apache (NYSE:APA) Wrap Up Q3 Energy Earnings Season.)

Oil prices sank to multi-month lows after reports showed that output by members of the OPEC cartel – whose associate nations supply around 40% of the world's crude – rose to an all-time high in Oct. At 33.64 million barrels a day, current production is way over OPEC’s target to limit volumes to a range of 32.5 million - 33 million barrels a day. Given the recent data sets, investors have started doubting whether OPEC will be able to rein in production as part of the plan reached in Sep.

Adding to the pessimism was the U.S. Energy Department's weekly inventory release, which showed a dramatic increase in domestic crude production.

Meanwhile, natural gas also turned sharply lower following a larger-than-anticipated inventory build that pushed the commodity’s storage level to a new all-time high. The commodity was further hampered by a warmer-than-normal weather that translates into weak demand for the heating fuel.

Recap of the Week’s Most Important Stories

1. Europe’s largest oil company Royal Dutch Shell plc recently announced its plan to invest $10 billion in Brazil over a span of five years. The company intends to tap into the increased opportunities for foreign companies in the Brazilian oil industry with this move. Shell currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Shell – the largest foreign investor in Brazil – plans to continue investing heavily in the country in order to double its global deep water production by the early 2020s. Shell plans to invest around $2 billion every year and it intends to fund the investment from the more than $30 billion in capital that it has already deployed in Brazil.

Following regulatory changes in Brazil, Shell seeks to expand its ultra deepwater oil exploration and production holdings in the country. Notably, the company already operates 5,500 energy stations in the nation and has acquired a large number of oil and gas assets via its takeover of BG Group this year. (Read more: Shell Announces Plan to Invest $10 Billion in Brazil.)

2. Chevron Corp., the second-largest U.S. oil producer, recently reported that it has started production at the Mafumeira Sul oil field along with Angolan state oil major – Sonangol. The initial production capacity of the field is 10,000 barrels per day.

The Mafumeira Sul oil field is estimated to produce 110,000 barrels per day or more, once fully developed. Located off the coast of Angola, the project is worth $5.6 billion and currently uses early production systems or EPS to produce 10,000 barrels of oil per day.

Sonangol has a 41% stake in the Mafumeira Sul oil project. Chevron, on the other hand, holds 39.2% interest. (Read more: Chevron Starts Production at Mafumeira Sul Field.)

3. U.S. independent ConocoPhillips (NYSE:COP) recently announced plans to commence a multi-billion-dollar divestment program next year in order to survive price volatility.

The company intends to sell assets valued between $5 billion and $8 billion, mainly from its North American natural gas portfolio. Given that Brent crude is now trading at about $50 per barrel, these activities will facilitate the company to accomplish its priorities like a debt level of $20 billion, a 20–30% payout of operating cash flows to shareholders as well as modest production growth to drive margin and cash flow expansion. According to the strategy for 2017, ConocoPhillips will announce a $3 billion share repurchase program.

Moreover, the company is expected to further trim its capital expenditures and costs in 2017 from the levels in 2016. Nonetheless, it will target a modest growth in production. ConocoPhillips now expects capex of about $5 billion next year, down 4% from the current year’s guidance of $5.2 billion. This also indicates more than 50% decrease from the 2015 capex and investments of $10.1 billion. (Read more: ConocoPhillips Plans Divestments Worth $8 Billion in 2017.)

4. World’s largest publicly traded energy company ExxonMobil Corp. (NYSE:XOM) and pipeline operator Sunoco Logistics Partners L.P. (NYSE:SXL) recently announced their decision to form a strategic joint venture (“JV”) by combining their key crude oil midstream assets, mainly in the Permian basin of West Texas.

Per a statement, Permian Express Partners – the new JV – will comprise assets owned by both companies. Sunoco Logistics will be the majority owner and operator of the JV assets with a stake of 85%, while ExxonMobil will hold the remaining 15%.

Sunoco Logistics will contribute its Permian Express 1, Permian Express 2 and Permian Longview and Louisiana Access pipelines to the JV. ExxonMobil, on the other hand, will contribute a Texas-Louisiana pipeline as well as its Pegasus pipeline, which runs from Texas to Illinois. (Read more: Exxon & Sunoco Logistics to Merge Midstream Assets, Form JV.)

5. Brazil's state-run energy giant Petrobras (NYSE:PBR) announced that its Oct production fell from its record output during Sep this year. During Oct, Petrobras’ total production came at 2.81 million barrels of oil equivalent per day (MMBOE/D), decreased 2.4% from 2.88 MMBOE/D during the prior quarter. It is to be noted that, Sep production of the company touched a new monthly record mark after crossing August 2016 figure of 2.72 MMBOE/D. Investors should know that out of total Oct production, 2.68 MMBOE/D output was generated from Brazil while remaining 0.12 MMBOE/D was from outside the country.

The Oct oil output in Brazil came at 2.19 million barrels per day (MMB/D), down 2% sequentially following production stoppages for maintenance of Floating Production, Storage and Offloading (FPSO) units. However, Petrobras revealed that the output achieved still now signifies that the company is nearing its yearly oil production projection of 2.145 MMB/D in Brazil.

The Oct natural gas output in Brazil was recorded at 77.5 million cubic meter/day, decreased 4.5% from September output. Halt in production following maintenance works of FPSO vessels led to the underperformances. However, outside Brazil, natural gas production came at 9.7 million cubic meter/day, increased 2.2% sequentially following production restart in Hadrian South, in U.S.

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.

Notwithstanding the past week’s decrease in oil prices, the reaction in energy stocks was positive. As a result, over the course of last week, ‘The Energy Select Sector SPDR’ was up 1.64%. Consequently, investors witnessed buying in most market heavyweights. The best performer was downstream operator Valero Energy Corp. (NYSE:VLO) whose stock price jumped 7.36%.

Longer-term, over the last 6 months, the sector tracker has gained 5.69%. Again, Valero Energy was one of the major beneficiaries during this period, experiencing a 13.39% price increase.

What’s Next in the Energy World?

With the Q3 earnings season now behind us, market participants will be again closely tracking the regular weekly 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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