Oil & Gas Stock Roundup: Elliott's QEP Bid, Transocean's Contract Win & More

It was a week where oil prices rallied but natural gas futures took a hit.

On the news front, activist firm Elliott Management proposed buying QEP Resources Inc (NYSE:QEP). (NYSE:E) for about $2 billion, while offshore driller Transocean Ltd. (NYSE:RIG) announced it has been awarded a five-year contract for an ultra-deepwater drillship by Chevron (NYSE:CVX) .

Overall, it was a mixed week for the sector. While West Texas Intermediate crude futures gained 5.8% to close at $47.96 per barrel, natural gas prices plunged some 7.8% to $3.044 per million Btu (MMBtu).

The U.S. crude benchmark booked its first weekly gain of the past four weeks after the Energy Department's inventory release showed that stockpiles remained essentially unchanged. While large build in product inventories (gasoline and distillate) played spoilsport, it was more than offset by bullish jobs data and optimism surrounding talks between the United States and China to resolve the trade war. Both these developments eased fears of a possible economic slowdown.

Meanwhile, natural gas prices recorded a weekly decline following a below-consensus decrease in supplies, which indicate weak demand for the heating fuel.

Recap of the Week’s Most Important Stories

1. QEP Resources rallied 40.3% post an acquisition proposal from shareholder Elliott Management Corp. Elliott, which owns a 5% stake in the company, has expressed plans of taking over all outstanding shares of the upstream energy player for a consideration of $8.75 a share, which is at 44% premium to the stock’s closing price on Jan 4.

Elliott added that its intent to acquire QEP Resources is dependent on the completion of the company’s Haynesville assets divestment. On Nov 19, Zacks Rank #3 (Hold) QEP Resources signed an agreement to offload Haynesville shale play-based natural gas and oil producing acres and supportive gathering properties for $735 million. The sale of its Haynesville operations reflects QEP Resources’ aim to become a Permian pure-play operator.

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

Elliott supports QEP Resources’ move to become a pure-play Permian firm but believes that those constructive efforts are yet to get reflected in the company’s stock price. This is the reason QEP Resources is significantly undervalued and hence the acquisition of the firm will boost shareholders’ value, added Elliott.

2. Transocean recently announced that it has won a major five-year drilling contract from Chevron, which will likely add $830 million to Transocean’s backlog. The amount excludes mobilization and reimbursable charges. Notably, as of Dec 5, the company had a total backlog of $12.2 billion.

The drilling contract is for one of Transocean’s two dynamically positioned ultra-deepwater drillships, which is currently undergoing construction at Singapore’s Jurong shipyard. The drillship is expected to come online in the second half of 2021 and operate in the Gulf of Mexico region. It will be rated for 20,000 pounds-per-square-inch (psi) operations, marking the first ultra-deepwater drillship with such a specification. It is expected to be the “industry’s most capable ultra-deepwater drillship,” whose configuration will comply with Tier III International Maritime Organization emissions standards.

In case of termination of the contract, Transocean will receive compensation for its incremental 20,000 psi subsea investment in the rig. The termination, if occurred after April 2020, will fetch Transocean a “substantial termination fee.” (Read more Transocean Inks $830-Million Drilling Contract With Chevron)

3. TOTAL S.A. (NYSE:TOT) has started production from the Egina Field, located offshore Nigeria. This field will increase the company’s total output from Africa by 200,000 barrels of oil per day. The project has been completed 10% below the budget stated initially, with TOTAL saving nearly $1 billion in capital investments.

In addition to this new startup, the kick-start of Train 3 of the Yamal LNG project, the Tempa Rossa oilfield in Italy and the second Train at Ichthys LNG in Australia will help the company to achieve its production growth target of 6-7% over the 2017-2020 time period.

At the end of third-quarter 2018, Africa contributed 676 thousand barrels of oil equivalent per day (kboe/d) to the company’s total production of 2,804 kboe/d. The addition of the new projects will increase TOTAL’s African output by another 200 kboe/d, reflecting a significant jump from previous production levels. (Read more TOTAL Increases Oil Output, Starts Production at Egina Field)

4. Eni S.p.A. (NYSE:E) recently agreed to acquire 70% stake in the Oooguruk oil field in Alaska from Caelus Natural Resources Alaska LLC. With Eni already holding 30% working interest in the oilfield, the Italian energy major’s operating stake in the same, following the closing of the deal, will be 100%.

The oilfield is located around five kilometers off the coast of North slope in Beaufort Sea. Oooguruk, which came online in 2008, currently produces 10,000 barrels of oil per day (BPD). There are 25 actively producing wells in the oilfield along with 15 wells to inject gas/water. The production facilities are installed on an artificial gravel island, at 1.5 meters of water depth, helping to keep the production trees dry.

The acquisition will enable the company to increase its total oil output from Alaska by 7,000 BPD. Moreover, the deal will boost the company’s presence in the region. It has 100% working interest in the Nikaitchuq oil field, which is located around 13 kilometers North-East of Oooguruk and produces approximately 18,000 BPD of oil. The deal is expected to lead to operational synergies and optimization from the assets in the region. (Read more Eni to Acquire 70% Stake in Oooguruk, Boost Alaska Presence)

5. The Williams Companies, Inc. (NYSE:WMB) recently received green signal from the Federal Energy Regulatory Commission (FERC) of the United States to commence full service on the Gulf Connector Expansion Project. This provided the company the opportunity to ship 475,000 dekatherm gas per day (Dt/d) through the Transco pipeline system in Texas and Louisiana.

The project is expected to support Cheniere Energy, Inc.’s liquified natural gas export terminal at Corpus Christi bay and Freeport LNG’s terminal at Brazoria County, TX. Both Cheniere and Freeport have plans to bring their LNG export terminals in Texas online, in a bid to offer commercial services within 18 months.

The approval from the FERC marks a significant landmark for Williams, as midstream asset developers in the United States are trying hard to connect their existing networks to the expanding natural gas export markets. The demand for liquified natural gas is expected to grow rapidly in 2019, as the search for cleaner energy sources is still on. (Read more Williams Receives FERC Nod to Gulf Connector Expansion)

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 line with the week’s bullish oil market sentiment, the Energy Select Sector SPDR – a popular way to track energy companies – generated a +4.9% return last week. The best performer was offshore driller Transocean, whose stock jumped 8.7%.

Longer-term, over six months, the sector tracker is down 20.9%. Oilfield service major Schlumberger (NYSE:SLB) was the major loser during this period, experiencing a 42.2% 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.

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