It was a week where oil prices extended the streak of gains, while natural gas futures slipped following a clutch of bearish data sets.

On the news front, European oil major BP plc (BP Quick QuoteBP - Free Report) started pumping natural gas from the Khazzan field in Oman, midstream energy player Phillips 66 Partners L.P. entered into a $2.4 billion agreement to buy Bakken assets from its parent, while Drilling powerhouse Transocean Ltd. (RIG Quick QuoteRIG - Free Report) decided to scrap six floaters, taking a $1.4 billion hit in the process. 

Overall, it was a mixed week for the sector. While West Texas Intermediate (WTI) crude futures gained 1.5% to close at $50.66 per barrel, natural gas prices fell 2.2% to $2.959 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: BP's Contract Renewal, SDRL's Bankruptcy, REN's Asset Sale.)

The U.S. oil benchmark closed at its highest level since May 24 as traders held out hope for price stability amid an improving supply-demand narrative. Data showing the number of U.S. oil rigs dropping for a third straight week helped cement those gains.

Energy bodies OPEC and IEA both recently raised global oil demand forecasts for this year, helping to tighten the market significantly. Further, the Paris-based IEA said that the global oil supply had come down by 720,000 per day last month to 97.7 million barrels on outages and maintenance in non-OPEC countries.

Meanwhile, according to the OPEC’s latest monthly report, the oil cartel’s production fell by 79,000 barrels a day in August to 32.76 million as output dropped in Libya, Gabon, Venezuela and Iraq. This points to the success of the 14-member group’s output curb initiatives and rising compliance levels, which reached a record 116%.

Adding to the positive momentum, OPEC and Russia claimed to be on the right track in clearing the global oil glut with half the job done.

The number of active rigs drilling for crude in the U.S. – an indicator of oil industry activity – fell by five to 744 as of Friday, as per data from oilfield services firm Baker Hughes Inc.

Meanwhile, an above-average increase in natural gas supplies, together with unfavorable weather forecasts and strength in the commodity’s production weighed on natural gas futures.

Recap of the Week’s Most Important Stories

1.    Energy giant BP plc announced the commencement of natural gas production at the Khazzan field in Oman. The company will be using fracking technology, which is rarely used in the Middle East. In the field, BP holds a 60% stake, while the remaining is owned by Oman Oil Company Exploration & Production.

The Khazzan gas project, estimated expected to have an inventory of 300 drilling wells, is the largest start-up for BP in 2017. Also, it is the sixth project start-up among the seven new key developments of the company this year. All the projects are likely to take the energy giant closer to its target of adding 800,000 barrels of oil equivalent every day by 2020.

BP has two planned phases for the Khazzan project. The company expects the field to generate 1.5 billion cubic feet of gas after the completion of the phases. Further, the company estimates recoverable reserves from the natural gas field of around 10.5 trillion cubic feet.

2.    Midstream energy player Phillips 66 Partners L.P. recently announced the signing of a deal worth $2.4 billion – with parent company Phillips 66 (PSX Quick QuotePSX - Free Report) .

Slated to close by early October, the deal will allow the partnership to buy Phillips 66’s 25% stake in each of Energy Transfer Crude Oil Company, LLC and Dakota Access, LLC. It is to be noted that the remaining 75% stake in Energy Transfer Crude Oil Company and Dakota Access, LLC lies with Bakken Holdings Company, LLC.

Investors should know that Dakota Access, LLC and Energy Transfer Crude Oil Company, LLC own and operate the Bakken Pipeline that includes both Dakota Access Pipeline (“DAPL”) and Energy Transfer Crude Oil Pipeline (“ETCOP”). The Bakken Pipeline spreads over 1,926 miles and has a capacity to transport 520,000 barrels of crude every day. Also per the agreement, Phillips 66 Partners is expected to purchase 100% stake in Merey Sweeny LP, which owns a coke processing plant at the Sweeny refinery of Phillips 66.

This will mark the largest ever transaction for Phillips 66 Partners. The addition of pipeline assets will provide the partnership with stable fee-based revenues. This will generate lucrative cash distributions for the unit holders. Phillips 66 Partners revealed that the transaction will grow its distribution by 30% and will also help generate $1.1 billion in annual operating income by 2018.

3.    Offshore driller Transocean Ltd. recently announced that it will retire six of its cold stacked floaters. The company expressed its desire to put the rigs up for sale, which can be recycled to be more environment-friendly. Following the move, Transocean is expected to incur an impairment cost of around $1.4 billion in the third quarter of 2017. Although the move may create a short-term headwind, most analysts believe that it will not affect the company in the long term.

The retirement of the six deepwater floaters is in line with the company’s strategy of increasing its fleet quality. The removal of old and less competitive rigs will make way for new high-specification assets, making the company’s operations more technically capable. It will provide Transocean’s fleet a competitive advantage. Also, reactivation cost for most of the cold-stacked rigs is high and will face tough competition from the new-build rigs due to the technological gap.

Transocean has four ultra-deepwater drillships under construction. Transocean’s recent purchase of Songa, a Norwegian company, may have led the company to take the step. Songa’s complementary assets and strong fleet quality will strengthen Transocean’s portfolio.

4.    In a bid to transform itself into a Delaware Basin pure play U.S.-based upstream company Halcón Resources Corporation recently inked a deal to offload non-operated assets in Williston Basin to a private player. These assets have a production capacity of 1,891 barrels of oil, 1,931 thousand cubic feet of gas and 65 barrels of natural gas liquids per day. Subject to regulatory approvals and satisfactory closing conditions, the deal will entitle a payment of up to $104 million to Halcón. Halcón plans to use the proceeds from the sale for reducing debt. This will strengthen the company’s balance sheet and provide it with increased liquidity to execute drilling projects.

Halcón, being one of the big sufferers of the weak crude environment, filed for bankruptcy in July 2016. In September, it completed financial restructuring and emerged from bankruptcy. Since then, the company has been divesting assets in most of its basins to concentrate on the prolific Delaware play. In less than nine months, Halcón divested around 2,000 wellbores across its obsolete and non-core assets for more than $2 billion cash proceeds. In July, the company sold around 104, 000 acres in Williston Basin for $1.04 billion. In August, it closed another $6 million deal to sell the non-operating assets in Williston Basin.

Since the beginning of 2017, the company has been strengthening its foothold in the Delaware Basin through acquisitions. This has enabled Halcón to increase its acreage in the region at a reasonable price and has poised it for growth. In the Delaware Basin, the company currently owns over 41,500 net acres in Ward and Pecos counties. In January, Halcón acquired over 21,000 acres in Pecos for $705 million, while divesting the El Halcón assets in the East Texas Eagle Ford for $500 million. Halcón also aimed to purchase an additional 15,040 net acres in Ward. The company bought around 594 acres in Pecos in March with a production capacity of 160 barrels of oil equivalent per day. In June, the company further increased its acreage by over 3,600 acres in Pecos. The company also expects to acquire an additional 8,320 net acres in the northern part of Ward, by Dec 31.

5.    Brazilian energy behemoth Petrobras (PBR Quick QuotePBR - Free Report) recently announced senior notes offering worth $2 billion. The offering will be made in two tranches.

The first tranche of the notes offering, with an interest rate of 5.3%, will raise $1 billion and is scheduled to mature in 2025. The second part worth $1billion carries an interest rate of 6% and is slated to mature in 2028. Petrobras intends to use the proceeds from the offering for the repayment of borrowings under its senior credit facility and for general corporate purposes.

The company has also offered holders additional notes maturing between 2019 and 2021, with the option to either repurchase their debt or exchange it with longer dated securities. The move will help the company to trim its outstanding debt load and extend the long-term maturities of securities.

Currently, Petrobras is concentrating on improving its liquidity and operational performance. The company’s efforts to deleverage or at least refinance its debt obligations to extend its maturity are working in its favor. The company’s divestment goals will help to reinstate its financial health by mitigating the leverage.

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.

The Energy Select Sector SPDR – a popular way to track energy companies –  generated a +1% return last week. The best performer was multinational oil company ConocoPhillips (COP Quick QuoteCOP - Free Report) whose stock rose by 7.1%.

Longer-term, over the last 6 months, the sector tracker edged down 0.6%. Offshore drilling rig operator Transocean Ltd. was the major laggard during this period, experiencing an 18.2% price decline.

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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