Oil & Gas Stock Roundup: Shell, Baytex, Petrobras & OPEC

It was a week where oil prices were buoyed by OPEC’s plans for a smaller-than-expected output raise. Meanwhile, natural gas futures again fell below the critical $3 threshold.

On the news front, Royal Dutch Shell (LON:RDSa) RDS.A said it has committed to the Fram gas field in the North Sea, while Canada’s Baytex Energy Corp. (TO:BTE) agreed to snap up rival Raging River Exploration Inc. for $2.3 billion. Meanwhile, Petrobras (NYSE:PBR) lost a wage dispute potentially costing the company 4.5 billion in U.S. dollars.

Overall, it was a mixed week for the sector. While West Texas Intermediate (WTI) crude futures gained about 5.8% to close at $68.58 per barrel, natural gas prices fell some 2.6% to $2.945 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: ExxonMobil, Chevron (NYSE:CVX), Transocean & More)

The U.S. oil benchmark rallied after OPEC agreed to stabilize the market by making modest increase in crude output. At the Vienna meeting, top producers came together and decided to raise volumes by about 1 million barrels per day from July to make up for falling production in Venezuela.

Friday’s consensus figure was well below some of the numbers that had been floated ahead of the meeting, while the actual addition is expected to be even lesser – at around 700,000 barrels a day – due to several member countries’ inability to boost exports.

Earlier in the week, oil futures were buoyed by the federal government’s EIA report that showed a large draw in crude stockpiles due to strong refinery runs. Data showing a reduction in U.S. oil drilling rig count brought further upside.

Meanwhile, natural gas prices moved southward last week as a larger-than-expected increase in supplies overshadowed the commodity’s growing use for air-conditioning.

Recap of the Week’s Most Important Stories

1. Royal Dutch Shell plc recently announced its intention to forge ahead with development of the Fram natural gas field in the North Sea. Banking on improving economics and recovering energy landscape, this is notably the second North Sea project approved by the European energy giant in the past six months.

Shell, along with Exxon Mobil (NYSE:XOM), which is its co-partner in the Fram project, intends to produce around 13,000 barrels of oil equivalent per day (comprising about 41 million cubic feet of gas along with 5,300 barrels of liquids a day) from the two wells in the Fram field by 2020. This will increase the The Zacks Rank #1 (Strong Buy) company’s output in the North Sea by 10%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Fram field, located 137 miles east of Aberdeen, will be connected using a subsea infrastructure to a processing facility, Shearwater, from which gas will be transported to the shore. Basically, the two wells will transport gas via a subsea pipeline to the Starling field, from which it will be further transported to the Shearwater platform through existing pipelines.

Utilizing the existing infrastructure from the nearby hubs will result in huge cost savings associated with the development of new fields. Reduction in development costs has in fact prompted Shell to reinvest in projects in the U.K. once again. (Read more Shell Eyes Fram Project, North Sea Regains Focus)

2. Baytex Energy recently inked a $2.3 billion all-stock deal to acquire western Canadian oil explorer, Raging River Exploration Inc., in a bid to bolster its operations in Alberta’s East Duvernay Shale. Notably, it marks the biggest buyout in the Canadian oil patch this year.

However, the deal failed to garner positive response from its shareholders, as evidenced by the dismal stock movement post the announcement of the merger. Shares of Baytex have dropped 11.92% to close at $3.40 on Jun 18, reflecting investors’ rough initial response toward the pricey deal. Investors are mainly concerned about the company’s intent to finance the deal by the issuance of new stocks that in turn are likely to hurt its earnings per share metrics.

Baytex’s operations are mainly focused on Eagle Ford, Peace River and Lloydminster regions while Raging River’s activities are mainly concentrated in East Duvernay (where it holds 260,000 acres of land), and Viking areas. Thus, the buyout expands the geographical footprint of Baytex, creating an enviable diverse portfolio of oil assets in five core areas namely Viking, Peace River, Lloydminster and East Duvernay Shale regions in Canada, and the Eagle Ford play in Texas. (Read more Baytex to Buy Raging River: A Closer Look)

3. Petrobras recently lost a wage lawsuit when Brazil’s Labor Court voted in favor of the workers of Petrobras seeking higher wages. This is notably the biggest lawsuit that the company has faced in the Brazil’s Labor Court, which is expected to cost the company around 17 billion reals or 4.5 billion in U.S. dollars.

The case is mainly centered on the Minimum Remuneration Level Regime (RMNR) policy, adopted by Petrobras in 2007. The employees argue that the payments related to special working conditions such as night shifts and hazardous working environment should not be included in the base wage calculation, which will thus lead Petrobras to make additional payment to comply with RMNR. In contrast, the company is of the opinion that such payments should be included in the base wage calculations itself.

The ruling in favor of the workers is likely to result in wage increase of around 35% for 59,000 employees. Petrobras intends to appeal the decision in the Supreme Federal Court. (Read more Petrobras Loses Wage Lawsuit, to Pay $4.5 Billion)

4. Schlumberger Ltd. (NYSE:SLB) recently won a U.S. Supreme Court ruling, which enabled the company to recover the profits lost due to unaccredited use of its patented technology outside the country by ION Geophysical Corporation. The ruling countermanded a previous decision from a lower court that constrained the usage of U.S. patent law abroad.

The previous ruling from the lower court reduced the damage compensation by $93.4 million. The said Schlumberger technology is used for finding oil and gas under the ocean floor. The significance of the latest ruling is that it enhances the ability of the patent holders to stop rivals and other companies from using their technologies abroad. It also helps them recover profits that were lost due to unauthorized usage of its technologies.

WesternGeco, a subsidiary of Schlumberger, was the one fighting the case against ION Geophysical regarding the use of four patented methods, used while conducting marine seismic survey. Notably, Schlumberger received compensation for damages caused due to the occurrence of infringement in the United States. Now the compensation basket includes the lost profits from overseas as well. (Read more Schlumberger Wins Supreme Court Patent Ruling Against ION)

5. Hess Corp. (NYSE:HES) reiterated the exploration potential of the Stabroek Block, following the announcement of the eighth oil discovery at the Longtail-1 well, offshore Guyana. Stabroek Block is spread across acreage of 6.6 million (26,800 square kilometers).

Located about five miles west of the Turbot-1 well, the Longtail-1encountered about 256 feet (78 meters) of superior, oil-bearing sandstone reservoir. The drilling of the well commenced on May 25, 2018, using the Stena Carron drillship to reach a total depth of 18,057 feet (5,504 meters) in 6,365 feet (1,940 meters) of water.

The previous outstanding discoveries on the Stabroek Block include Liza, Payara, Liza Deep, Snoek, Turbot, Ranger and Pacora. Currently, drilling results of Longtail are under appraisal. The combined gross recoverable resources of Turbot and Longtail are projected to surpass 500 million barrels of oil equivalent. (Read more Hess Discovers Oil in Longtail-1 Exploration Well)

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.

Reflecting the positive post-OPEC oil market sentiment, the Energy Select Sector SPDR – a popular way to track energy companies – generated a +1.3% return last week. The best performer was offshore drilling powerhouse Transocean Ltd. (NYSE:RIG) whose stock rose 6.5%.

Longer-term, over six months, the sector tracker is up 1.8%. Downstream operator, Valero Energy Corp. (NYSE:VLO) is far and away the major gainer during this period, experiencing a 18.9% price appreciation.

What’s Next in the Energy World?

Following the conclusion of the OPEC meeting, market participants are back 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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