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Oil & Gas Stock Roundup: Q3 Updates From Shell and APA Lead Week's Action

It was a week when oil prices reclaimed the $90 mark but natural gas futures continued to trend downward.

On the news front, Europe’s largest oil company Shell plc SHEL and upstream biggie APA Corporation APA issued updates on their upcoming Q3 earnings. Developments associated with Chevron CVX, Tullow Oil TUWOY and Northern Oil & Gas NOG also made it to the headlines.

Overall, it was another mixed seven-day period for the sector. West Texas Intermediate (WTI) crude futures jumped some 16.5% to close at $92.64 per barrel but natural gas prices decreased a marginal 0.3% to end at $6.748 per million British thermal units (MMBtu). In particular, the oil market continued its robust recovery from last week.

Coming back to the week ended Oct 7, U.S. oil prices recorded a big climb after the OPEC and its allies, including Russia — collectively referred to as OPEC+ — agreed to trim crude output by two million barrels per day (bpd) from November, the most since the group’s historic 9.7 million bpd cut in early 2020 when the pandemic broke out

On the other hand, natural gas finished down slightly, primarily due to mild weather, a bearish inventory report and a spurt in production.

Recap of the Week’s Most Important Stories

1. Shell said its third-quarter profits will bear the brunt of extreme volatility and tumbling refining margins. While extreme market volatility meant that the Integrated Gas division will deliver a lower contribution to earnings, the moderation of refining margins from their spectacular levels earlier in the year affected the Chemicals & Products unit.

According to the latest update, Shell’s LNG liquefaction volumes are expected in the range of 6.9-7.5 million tons, implying a deterioration of around 2.6% year over year and 6% sequentially. Shell’s integrated gas production is expected to decrease to the range of 890,000-940,000 barrels of oil equivalent per day (BOE/d) or 915,000 BOE/d at the midpoint. It was 938,000 BOE/d in the third quarter of 2021 and 944,000 BOE/d in the June quarter. Per this Zacks Rank #1 (Strong Buy) company, third-quarter trading and optimization results in its integrated gas unit will be “significantly lower compared to the second quarter 2022” due to seasonality and market volatility.

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

The company fears that a drop in refining profitability is expected to bring down adjusted EBITDA from their second-quarter levels. As projected by Shell, the refining margin should considerably weaken in the third quarter, with the metric plunging 46% sequentially. The decrease would hurt product earnings by $1.2 billion at the midpoint of SHEL’s estimates. Similarly, negative margins in Shell’s chemicals-refining operations could take away $300 million to $600 million from third-quarter earnings, the company said. (All You Need to Know About Shell's Q3 Earnings Update)

2.  APA recently announced supplemental information concerning third-quarter 2022 financial and operational results. This Houston, TX-based independent energy firm stated that it now anticipates third-quarter U.S. production to be 212 thousand barrels of oil equivalent per day (Mboe/d), exceeding the high end of its earlier outlook.

However, APA mentioned that third-quarter international volumes of 171 Mboe/d lagged the lower end of the previous guidance. The shortfall could be attributed to poor North Sea production, which was 8 Mboe/d lower than the guidance due to substantial unplanned downtime in August and September.

APA also provided an estimate of average realized prices for the quarter, with U.S. prices projected at $94/barrel for oil, $33/barrel for natural gas liquids and $6.80 per thousand cubic feet (Mcf) for natural gas. Meanwhile, the international average realized prices are $100/barrel for oil, $66/barrel for NGL and $4.10/Mcf for gas. (APA Updates Q3 2022 Guidance, Expects Greater U.S. Production)

3. U.S. energy supermajor Chevron and environment-friendly fuel company California Bioenergy LLC recently declared a joint investment in their second holding company to produce and market dairy biomethane as renewable natural gas (RNG) transportation fuel in California.

The holding company — CalBioGas Hilmar LLC — obtained the initial funding from CVX to construct the necessary infrastructure required for dairy biomethane projects in California’s Merced County at the time of signing.

California Bioenergy brings technology and operational experience to help dairy farmers build digesters and methane capture projects to convert the methane obtained from manure storage on dairy farms to RNG for usage. Meanwhile, Chevron will be responsible for the additional funding for seven digesters and one central upgrading facility across a cluster of dairy farms in Merced County. (Chevron, California Bioenergy to Produce Biomethane Fuel)

4   British oil and gas exploration and development company — Capricorn Energy — has abandoned its merger plans with Africa-focused Tullow Oil in favor of a deal with Israeli natural gas group, NewMed Energy.

The all-stock deal between Capricorn and NewMed will lead to the creation of an Israel-Egypt-focused gas producer. This will include NewMed's interest in Israel's giant Leviathan offshore field at a time when Europe is hustling for non-Russian energy supplies. Per the deal, NewMed shareholders will get 2.337344 new Capricorn shares for each of their existing units. Capricorn shareholders will hold about 10.3% of the combined entity with NewMed stockholders, along with the partnership’s current general partner owning the remaining interest.

This announcement comes weeks after Tullow stated that it was “fully committed” to the earlier declared all-stock deal with Capricorn. The deal would have led to the formation of a £1.4 billion Africa-focused energy company despite Capricorn looking for alternatives following shareholders’ opposition to its merger with Tullow. (TUWOY's Merger Plans Ditched by Capricorn for Israel's NewMed)

5   Northern Oil & Gas recently declared that it has signed an acquisition agreement to take over certain oil and gas assets in the Northern Delaware Basin in the United States from privately owned Alpha Energy Partners. The initial consideration, which is worth around $157.5 million in cash, is subject to closing adjustments.

The properties are mainly situated in the Lea and Eddy counties in New Mexico and Loving County, TX. These include about 2,800 acres, 9.6 net producing wells, 2.8 net AFEs and wells in process and approximately 21.2 net undeveloped locations. These assets are primarily operated by Mewbourne Oil. Meanwhile, other operators include the likes of Conoco and EOG.

The independent upstream operator expects production between 3,000 and 3,500 barrels of oil equivalent (Boe) per day in 2023 from the acquired assets. Moreover, due to robust growth and a strong free cash flow profile, with $32 million average annual capital spending projected on the assets over the next three years, the assets will deliver an output of more than 4,000 Boe per day in 2024 and 2025. (Northern to Acquire Northern Delaware Assets for $157.5M)

Price Performance

The following table shows the price movement of some major oil and gas players over the past week and during the last six months.

Company    Last Week    Last 6 Months

XOM                 +15.7%           +13.8%
CVX                  +11.4%           -7.5%
COP                 +15.8%           +13.3%
OXY                  +13.6%           +6.2%
SLB                  +18.6%           -0.1%
RIG                   +25.1%          -30.6%
VLO                  +6.5%             +7.4%
MPC                 +7.6%             +22.1%

With oil gaining handsomely for the week, stocks exploded higher. The Energy Select Sector SPDR — a popular way to track energy companies — surged 13.6% last week. Over the past six months, the sector tracker has edged up 0.7%.

What’s Next in the Energy World?

Following last week’s mixed fortunes for oil and gas, market participants will closely track the regular releases to look for further guidance on the direction of prices. In this context, the U.S. government’s statistics on oil and natural gas — one of the few solid indicators that come out regularly — will be on energy traders' radar.

Data on rig count from the oilfield service firm Baker Hughes, which is a pointer to the trends in U.S. crude/natural gas production, is closely followed too. News related to the ongoing Russia-Ukraine geopolitical conflict and the potential demand loss from the intermittent coronavirus lockdowns in China will be the other factors that will dictate the near-term price movement of the commodities. Finally, the closely watched monthly reports from three key agencies (EIA, OPEC and the IEA) complete the releases this week.


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