Oil & Gas Stock Roundup: Concho Midstream Monetization, Noble Energy Project Approval

It was a week where oil prices settled at their highest since November, while natural gas futures remained steady.

On the news front, Permian operator Concho Resources (NYSE:CXO) handed over its stake in a large midstream infrastructure system in the region to a private equity fund. Meanwhile, another independent upstream company Noble Energy (NYSE:NBL) sanctioned the development of the Alen field off Equatorial Guinea.

Overall, it was a mixed week for the sector. While West Texas Intermediate (WTI) crude futures rose 4.9% to close at $63.08 per barrel, natural gas prices held almost unchanged for the week to finish at $2.664 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Good News for TransCanada, Enbridge)

The U.S. crude benchmark rallied to the highest in five months, underpinned mainly by production cuts from the OPEC-led group of exporters, and drop in supply from Venezuela and Iran. The so-called OPEC+ deal (an alliance of OPEC, Russia and other non-member countries) is withholding output by around 1.2 million barrels per day until the end of June. U.S. sanctions against Venezuela and Iran also continue to tighten the commodity’s fundamentals.

Further to this, Signs of stable demand (contrary to previous expectations of slowing consumption) boosted bullish sentiment in the energy market.

Meanwhile, natural gas prices were little changed even as the injection season began this past week with a bearish report that showed a larger-than-average increase in supplies.

Recap of the Week’s Most Important Stories

1. Concho Resources announced its decision to divest stake in Oryx Midstream to Stonepeak Infrastructure Partners. The transaction entails the sale of a 23.75% stake of Concho in the Oryx I gathering system that is owned by Oryx Midstream, a privately-held energy player possessing key midstream assets like gathering and transportation system of crude in the prolific Permian. Concho is likely to get roughly $300 million upon closing of the agreement.

In view of the recent deal, Concho is expecting to bag $300 million, which is in addition to $157 million it received in February 2018 from recapitalization of Oryx. Hence, the current total consideration of $457 million is representing 10 times increment to the company’s initial investment of $45 million in Oryx I in December 2015.

Investors In addition to Concho, WPX Energy Inc. (WPX) also announced its decision to sale stakes in Oryx Midstream to Stonepeak Infrastructure Partners, a private equity firm. Notably, WPX Energy has 25% equity ownership in the Oryx II pipeline. The divestment deal will likely fetch roughly $350 million to the Permian-focused upstream firm. (Read more Concho Monetizes Permian Midstream Assets: Here's Why)

2. Noble Energy announced that it has approved the development of the Alen natural gas project situated offshore Equatorial Guinea (“EG”). Gross capital expenditure for the development of this project is estimated to be $330 million, of which the company’s share is nearly $165 million.

Natural gas from the Alen field will be processed through the existing Alba Plant LLC liquefied petroleum gas processing plant (Alba Plant) and EG LNG’s liquefied natural gas production facility (EG LNG) located at Punta Europa, Bioko Island.

The Alen field is located on Block O (95%) and Block I (5%), offshore EG. Noble Energy operates the Alen field and holds nearly 45% working interest in the project (45% in Block O and 38% in Block I). First production from this offshore Alen field is anticipated in the first half of 2021, with natural gas sales anticipated within 200-300 million cubic feet per day (MMcfe/d). Noble Energy’s share in the said production is expected in the range of 75-115 MMcfe/d. (Read more Noble Energy Approves Alen Gas Project in Equatorial Guinea)

3. TOTAL SA (NYSE:TOT) and Tellurian Inc. (NASDAQ:TELL) — a liquefied natural gas (LNG) player based in the United States — have inked several deals to develop the Driftwood liquefied LNG project in Louisiana.

Recently, the parties have inked a non-binding heads of agreement (“HOA”). Per the terms, TOTAL will invest in Driftwood Holdings and offtake 2.5 million tons per annum (mtpa) of LNG. Also, the companies will enter into a binding sales and purchase agreement (SPA) to take 1.5 million tons per annum of LNG from Tellurian Marketing’s LNG offtake volumes from the Driftwood project.

The deal involves an equity investment of $500 million by TOTAL in Driftwood LNG along with the purchase of an additional 1 mtpa of LNG from the proposed project. The SPA relates to the procurement of LNG on a free-on-board (FOB) basis for a minimum of 15 years. The price will be based on Platts Japan Korea Marker (JKM).

(Read more TOTAL, Tellurian Ink Deal Related to Driftwood LNG Project)

4. Royal Dutch Shell (LON:RDSa) plc RDS.A and Tokyo Gas Company Limited recently inked a long-term liquefied natural gas (‘LNG’) deal, in accordance with an innovative purchase pricing formula that is partly based on coal indexation. Per the deal, the Zacks Rank #2 (Buy) integrated energy super major will supply 500,000 tons of LNG annually to the Japanese utility firm, Tokyo Gas,for a period of ten years starting April 2020.

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

The deal is worthy of attention because of the usage of coal-index pricing for the LNG contract unlike the usual oil indexation or natural gas benchmark Henry Hub. Markedly, this move marks the first time a Japanese firm will be using a coal-based pricing formula for an LNG contract. While part of the supply will be based on coal indexation, the remaining will be priced off traditional oil and gas linked indexes.

The move of linking LNG contract to coal prices is more of a risk management strategy of Tokyo Gas. By diversifying its price exposure for LNG via coal indexation, the company will be able to better compete in its own power market that is dominated by coal. The deal allows Tokyo Gas to obtain a secured supply of LNG and stabilize the company’s cost exposure. (Read more Shell and Tokyo Gas LNG Deal Is Unique: Here's Why)

5. Forging ahead with its divestment goals, Petrobras (NYSE:PBR) is set to offload 90% stake in its natural gas pipeline unit, Transportadora Associada de Gás (‘TAG’) to Engie SA-led consortium for $8.6 billion. Markedly, this will be the largest-ever single asset sale for the Brazilian energy giant, which has been making serious efforts to trim its huge debt burden.

TAG’s gas pipeline system, spanning 4,500 kilometers, is primarily located in the north and northeast of Brazil. It can transport up to 74.7 million cubic feet per day, which is fully contracted through long-term agreements with ship-or-pay clauses.

For Petrobras, the divestment is in sync with its aim to cut debt levels. Notably, while the company’s net debt of $100 billion peaked in 2015, concentrated efforts to lower leverage, boost liquidity through operational efficiency and divest non-core assets have helped Petrobras in deleveraging to a considerable extent. Its net debt declined to $69.4 billion in 2018, decreasing from $84.9 billion a year ago and $96.4 billion in 2016. (Read more Petrobras Divestment Goals to Get Boost from $8.6B TAG Sale)

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.

In keeping with the week’s positive oil market sentiment, the Energy Select Sector SPDR – a popular way to track energy companies – generated a +2.3% return last week. The best performer was downstream biggie Marathon Petroleum (NYSE:MPC) whose stock gained 6%.

But longer-term, over six months, the sector tracker is down 12.7%. Offshore driller Transocean Ltd (NYSE:RIG). was the major loser during this period, experiencing a 36% price decline.

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. Finally, the closely watched monthly reports from three key agencies (EIA, OPEC and the IEA) are due for release this week.

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