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Oil & Gas Stock Roundup: Schlumberger, Halliburton Beats and Sees Drilling Upswing

It was a week which saw oil prices hit a 15-month peak, while natural gas futures fell below the psychologically important $3 threshold.

On the news front, oilfield service majors Schlumberger Ltd. SLB and Halliburton Company HAL kicked off the energy earnings season with better-than-expected numbers. Importantly, both the companies indicated that their North American clients have returned to drilling this summer.

Overall, it was a mixed week for the sector. While West Texas Intermediate (WTI) crude futures edged up 1% to close at $50.85 per barrel, natural gas prices plunged 8.9% to $2.993 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: RSP Permian's $2.4B Buy, Chevron's Bangladesh Exit Plans.)

Oil prices notched up their fifth successive weekly gain as investors clung on to optimism generated by OPEC and non-OPEC players’ commitments to slash production targets next month.

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Apart from the OPEC announcement, oil prices were also supported by the U.S. Energy Department's weekly inventory release, which showed that domestic crude stockpiles declined unexpectedly.

To a large extent though, the optimism was tempered by the Baker Hughes report revealing an eighth straight rise in the U.S. oil rig count and pointing to the resurgence in shale drilling activities

Meanwhile, natural gas turned lower following a higher-than-expected build. The commodity has also been hampered by a warmer-than-normal autumn weather that translates into weak demand.

Recap of the Week’s Most Important Stories

1.    The world’s largest oilfield services provider Schlumberger Ltd. reported third-quarter 2016 earnings of 25 cents per share (excluding Cameron merger and integration charges), which came in above the Zacks Consensus Estimate of 22 cents. Higher activities in the land market of the U.S along with fracturing work recovery in North America led to the earnings beat. This clearly indicates that oil producers are putting more rigs in the continent again.

However, the bottom line decreased substantially from 78 cents per share earned in the year-earlier quarter. Continual decline in deepwater operations led to the year-over-year deterioration.

Schlumberger expects the demand for oil to increase in 2017. According to the company the increase in demand as well as the OPEC’s intention to cut crude production would lead to oil price recovery in the long run. (Read more: Schlumberger Earnings Beat, Revenues Miss in Q3.)

2.    Major oilfield services provider Halliburton Company reported surprise third quarter profit on the back of continued and effective cost management. The world’s No. 2 oilfield-services company’s ninth consecutive quarterly outperformance was also helped by improved utilization on the back of growing North American rig count. Halliburton currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Halliburton’s net income per share came in at 1 cent, contrary to the Zacks Consensus Estimate for a loss of 7 cents. However, revenues of $3,833 million missed the Zacks Consensus Estimate of $3,897 million amid the oil slump.

Along the results, Halliburton also sounded optimistic in its view that the current industry upturn will boost rig count further. As a proof of the recovery, Halliburton reported 9% sequential growth in North American sales. However, most of this bullish sentiment was offset by lower business in other parts of the world.

 Halliburton warned that fourth quarter activity is likely to be weak due to holiday and seasonal weather-associated disruptions. Moreover, pricing pressure is expected to continue over the near-term with international business set to be flat sequentially. (Read more: Halliburton Swings to Surprise Q3 Earnings on Cost Cuts.)

3.    Denver, CO-based oil and gas producer SM Energy Co. SM agreed to acquire almost 35,700 net acres in the Midland Basin of West Texas for a consideration of $1.6 billion in cash and stock. Simultaneously, the company decided to divest its resources in North Dakota’s Williston Basin for roughly $785 million.

The acquisition plan reflects SM Energy’s focus on increasing its resources in the most productive properties so as to be able to earn significant cash flows for shareholders in the long run. Notably, the latest deal, which is anticipated to complete in December this year, will increase SM Energy’s asset base in the Permian Basin to 82,450 net acres.

We note that SM Energy has been selling assets that do not fit its portfolio to enhance its presence in the Permian Basin. In fact, a major part of the aforesaid Permian Basin acreage buyout will be funded using the proceeds generated from the sale of Williston Basin properties. The remainder will likely be financed from the company’s revolving credit line. (Read more: SM Energy Snaps Up Additional Permian Acreage for $1.6B.)

4.    Brazil’s state-owned energy major Petrobras PBR agreed to settle four lawsuits by investors in New York federal court. The lawsuits – led by PIMCO Total Return Fund, et al., Dodge & Cox International Stock Fund, et al., Janus Overseas Fund, et al., and Al Shams Investments, et al – claimed losses resulting from a vast corruption scandal that engulfed the Rio de Janeiro-headquartered company. The plaintiffs alleged that Petrobras gave false information to investors about the scope and scale of the graft scheme that has wiped billions of dollars in value from the company's books.

Following the settlement, Petrobras will include a $353 million provision in the third quarter to cover the costs. Denying all allegations of wrongdoing, Petrobras maintained that the settlement was meant at eliminating the uncertainties and costs associated with the litigations

5.    Integrated energy major Royal Dutch Shell plc RDS.A recently announced that its affiliate, Shell Canada Energy, has entered into an agreement to divest around 206,000 net acres of non-core oil and gas properties in Western Canada to local natural gas producer Tourmaline Oil Corp. This sale is expected to garner more than $1 billion.

Per the Anglo-Dutch energy giant, the proceeds comprise $758 million in cash and Tourmaline shares valued at $279 million. The deal is effective Nov 1 and expected is to close at the end of 2016.

This sale is part of the Shell’s plan to raise around $30 billion from assets sales in the three years through 2018 to help shore up its finances following its mega merger with BG Group. Notably, the merger with BG Group raised Shell’s total debt level to $90.3 billion from $52.9 billion a year earlier. (Read more: Shell Affiliate to Divest Canadian Assets Worth $1 Billion.)

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

-0.15%

-0.48%

CVX

+0.30%

-0.84%

COP

-2.17%

-8.71%

OXY

+1.76%

-0.09%

SLB

-0.04%

+1.96%

RIG

+5.20%

-1.46%

VLO

+4.00%

-9.08%

TSO

+2.16%

-5.35%

Over the course of last week, ‘The Energy Select Sector SPDR’ was up by a small 0.26%. Consequently, investors witnessed buying in some market heavyweights. The best performer was offshore drilling giant Transocean Ltd. RIG that added 5.20% to its stock price.

Longer-term, over the last 6 months, the sector tracker has gained 5.57%. Oilfield services behemoth Schlumberger Ltd. was one of the major beneficiaries during this period, experiencing a 1.96% price increase.

What’s Next in the Energy World?

As usual, market participants will be closely tracking the regular weekly releases i.e. the U.S. government data on oil and natural gas. Energy traders will also be focusing on the Baker Hughes data on rig count. However, the 2016 Q3 earnings remain the primary focus this week, with a number of S&P 500 members coming out with quarterly results.

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PETROBRAS-ADR C (PBR): Free Stock Analysis Report
 
SCHLUMBERGER LT (SLB): Free Stock Analysis Report
 
HALLIBURTON CO (HAL): Free Stock Analysis Report
 
ROYAL DTCH SH-A (RDS.A): Free Stock Analysis Report
 
TRANSOCEAN LTD (RIG): Free Stock Analysis Report
 
SM ENERGY CO (SM): Free Stock Analysis Report
 
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