Oil & Gas Stock Roundup: Concho Strengthens Permian Hold, Tallgrass to Buy MLP

It was a week where oil finished lower but natural gas futures turned around to score a gain.

On the news front, energy explorer Concho Resources Inc. CXO agreed to buy smaller rival RSP Permian Inc. for $9.5 billion to expand its presence in the prolific Permian play, while midstream operator Tallgrass Energy GP, LP TEGP announced plans to consolidate its business through a merger deal with its master limited partnership.

Overall, it was another mixed week for the sector. While West Texas Intermediate (WTI) crude futures lost around 1.4% to close at $64.94 per barrel, natural gas prices rose 5.5% to $2.733 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Shell Quits New Zealand, Statoil to Become Equinor)

The U.S. oil benchmark closed in the red last week, falling below the psychologically important $65 per barrel level. The decline was triggered by the EIA crude inventory numbers showing a rise in supplies and production.

The federal government’s EIA report revealed that crude inventories were up by 1.6 million barrels for the week ending Mar 23. The analysts surveyed by S&P Global Platts – the leading independent commodities and energy data provider – had expected crude stocks to go up some 1 million barrels. Record high domestic production led to the stockpile build with the world's biggest oil consumer.

In particular, U.S. output rose by 26,000 barrels per day last week to more than 10.4 million barrels per day – the most since the EIA started maintaining weekly data in 1983. In early February, oil production broke through the 10 million barrels a day threshold for the first time in nearly 50 years and has maintained the record levels thereafter.

Surging output from the U.S. shale has been looming over the oil markets, threatening to undermine output curbs by OPEC and its allies.

Meanwhile, natural gas prices moved northward last week despite a smaller-than-expected decrease in supplies. However, the 63 billion cubic feet (Bcf) withdrawal was more than the five-year average net shrinkage of 46 Bcf for the reported week. Investors were also encouraged by forecasts of colder weather for early April that might lead to the fuel’s strong demand.

Recap of the Week’s Most Important Stories

1.    Concho Resources, an upstream player, recently signed a deal to acquire its rival RSP Permian Inc. in a $9.5 billion deal, to expand its presence in the prolific Permian play.

The agreement marks the largest takeover in the oil and gas exploration and production industry since 2012 and the biggest pure-Permian deal ever. The acquisition is set to create a humongous Permian Pure-play and likely to make the Zacks Rank #1 (Strong Buy) Concho one of the top energy producers in the Permian basin. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The complementary asset base has been the key driver of the deal. The buyout will integrate the premier assets of both the companies, bolstering the scale and leadership position of the combined entity in the region. The deal will enable the companies to pool their expertise in the region and share their best practices, thereby enhancing buying power in securing services in the region.

The deal adds 92,000 acres of complementary holdings to Concho’s Permian portfolio, expanding the total Permian acreage of the company to 640,000 net acres. The combined entity is set to run 27 rigs in the region, marking one of the largest drilling programs in the Permian shale play. (Read more Concho Inks Mega $9.5B Deal to Acquire RSP Permian)

2.    Oil and gas midstream infrastructure provider Tallgrass Energy GP, LP announced plans to merge with Tallgrass Energy Partners. For the acquisition to take place, Tallgrass Energy GP is expected to purchase 47.6 million common units of its master limited partnership — Tallgrass Energy Partners. Each unit holder of Tallgrass Energy Partners will get two Class A shares of Tallgrass Energy GP.

Following the closure of the merger, scheduled in the April to June quarter of 2018, the combined entity will be trade as Tallgrass Energy LP. The symbol of the ticker that will be listed in the NYSE is ‘TGE.’

Per management, once the merger is complete, Tallgrass Energy Partners will no longer pay incentive distribution rights to its general partner. Eventually, the cost of capital of Tallgrass Energy will be reduced significantly, which will be allotted for future growth projects and also for making acquisitions. (Read more Tallgrass to Lower Capital Cost Through Merger Deal)

3.    Unit Corporation UNT, a diversified energy company, is set to divest 50% of its interest in its natural gas processing wholly-owned subsidiary, Superior Pipeline Co. LLC for a total consideration of $300 million. The pipeline company operates three natural gas treatment plants, 13 processing plants and 22 gathering systems. The 1,455-mile long Superior Pipeline carries a processing capacity of 340 million cubic feet per day. The company operates in Oklahoma, Texas, Kansas, Pennsylvania and West Virginia.

Unit will be selling half the stakes to SP Investors Holdings LLC or Superior Holdings. Cash proceeds from the sale will be utilized to bolster the drilling program of Unit Corporation’s upstream subsidiary, Unit Petroleum Company. The company’s drilling segment is witnessing higher utilization and dayrates improvements of late. The company believes that the acceleration of its drilling program will enhance its production and reserve growth. As it is, the company’s estimated total reserves in 2017 witnessed a 27% year-over-year increase to come in at 149.8 million barrels of oil equivalent.

Further, the proceeds will also enable the company to make additional investments in the Superior Pipeline that will be henceforth jointly owned by Unit Corporation and Superior Holdings. (Read more Unit to Vend 50% Stake in Superior Pipeline for $300M)

4.    Royal Dutch Shell plc RDS.A  recently selected Gretchen Watkins as the new President for the company’s North American operations, effective Jan 1, 2019. Watkins will replace the current President and Executive Vice President of Unconventionals. Both of them will be stepping down this year, with Watkins eventually assuming both the roles. She will supervise the sprawling U.S. operations that include wells and refineries from the Gulf of Mexico to Pacific Northwest.

On Jul 1, 2018, Watkins will replace Greg Guidry as Shell’s executive vice president of Unconventionals. Eventually, the current Shell U.S. County Chair and President, Bruce Culpepper will also step down on Dec 31, 2018 and be succeeded by Watkins. Both Culpepper and Guidry have had been veterans in the company working for 37 and 36 years, respectively.

Watkins joined Maersk Oil in 2014 as the COO and was elected as the CEO of the company in 2016. She left the company after its acquisition by the supermajor TOTAL S.A. Prior to joining Maersk Oil, she served as the vice President of Houston-based Marathon Oil Corporation. (Read more Shell Selects Watkins as President for Its U.S. Operations)

5.    PetroChina Company Ltd. PTR announced 2017 earnings of RMB 22,793 million or RMB 0.12 per diluted share compared with RMB 7,900 million or RMB 0.04 per diluted share a year earlier. Moreover, China’s dominant oil and gas producer’s total revenue for the year jumped 24.7% from 2016 to RMB 2,015,890 million.

The positive comparisons can be primarily attributable to higher oil prices, which helped its exploration and production unit to report a jump in profitability. Interestingly, the company has decided to pay all of its annual profit of RMB 22,793 million as interim dividend to its stockholders – something it did in the first half as well.

Average realized crude oil price during 2017 was $50.64 per barrel, 33.3% higher than the year-ago period. This buoyed the upstream (or exploration & production) segment results, which posted an operating income of RMB 15,475 million compared to a much smaller operating profit of RMB 3,148 million in 2016.

Following the robust showing, PetroChina has decided to boost 2018 capital expenditure. The group pegged its 2018 capital budget at RMB 225,800 million, up 4.4% from what it invested in 2017 as it focuses to cash in on the recovery in crude prices. (Read more PetroChina Pays Big Dividend as Oil Rally Boosts Profit)

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.

Company	Last Week	Last 6 Months
XOM	+0.9%	-10.5%
CVX	-0.3%	-4.7%
COP	+3.1%	+17.8%
OXY	-1.8%	+1.1%
SLB	-1%	-7.8%
RIG	-2.9%	-6.3%
VLO	-1%	+18%
ANDV	-1.1%	-4.1%

Reflecting the week’s bearish oil market sentiment, the Energy Select Sector SPDR – a popular way to track energy companies – generated a -0.3% return last week. The worst performer was offshore drilling powerhouse Transocean Ltd. RIG, whose stock slumped 2.9%.

Longer-term, over six months, the sector tracker is down 3.4%. Oil giant ExxonMobil Corp. XOM was the major decliner during this period, experiencing a 10.5% price depreciation.

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.

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Tallgrass Energy GP, LP (TEGP) : Free Stock Analysis Report
 
Unit Corporation (UNT) : Free Stock Analysis Report
 
PetroChina Company Limited (PTR) : Free Stock Analysis Report
 
Royal Dutch Shell PLC (RDS.A) : Free Stock Analysis Report
 
Exxon Mobil Corporation (XOM) : Free Stock Analysis Report
 
Transocean Ltd. (RIG) : Free Stock Analysis Report
 
Concho Resources Inc. (CXO) : Free Stock Analysis Report
 
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