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Oil & Gas Stock Roundup: EQT-Rice Energy Tie-Up, Chevron's $9.5B Legal Reprieve & More

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It was a week where oil prices dropped to the lowest close since Nov 14 amid a bearish inventory data, while a production boom prevented natural gas futures from breaking out despite a smaller-than-expected increase in supplies.

On the news front, shale driller EQT Corp. (EQT - Free Report) said it would acquire smaller producer Rice Energy Inc. in a $6.7 billion deal to become the largest producer of natural gas in the U.S., while supermajor Chevron Corp. (CVX - Free Report) scored a big legal victory over pollution claims in Ecuador that protects the company from having to pay $9.5 billion fine.

Overall, it was a mixed week for the sector. While West Texas Intermediate (WTI) crude futures fell 2.4% to close at $44.74 per barrel, natural gas prices remained essentially unchanged at $3.037 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: SemGroup Buys Terminal Co., Encana & Centrica Sell Gas Assets.)

Oil prices sank to their lowest settlement of 2017, spooked by the U.S. Energy Department's inventory release. The report revealed that crude stockpiles recorded a lower-than-expected weekly draw. On a further bearish note, the report revealed that refined product inventories – gasoline and distillate – both rose from their week earlier levels. Investors also fretted over the burgeoning rig count – pointing to the ever-increasing shale drilling activities.

Meanwhile, natural gas futures stayed flat despite a smaller-than-expected increase in supplies. In particular, worries over the fuel’s steady production growth kept prices in check.

Recap of the Week’s Most Important Stories

1.    In a landmark deal, oil and gas company EQT Corp. has decided to acquire smaller rival Rice Energy Inc. for a total consideration of $6.7 billion. This is the largest accord signed in the upstream industry of U.S in around three years.

Per the agreement, for every share, stockholders of Rice Energy will get 0.37 EQT shares and $5.30 in cash. On top of that, EQT Corp. will refinance Rice Energy’s $1.5 billion in long-term debt. It is to be noted that the transaction will likely close by fourth-quarter 2017. In the combined entity, the shareholders of EQT Corp. will hold around 65%.

EQT Corp. and Rice Energy are among the leading producers of natural gas in the Marcellus and Utica shale plays. Hence, with the deal completion, both the upstream companies will create the largest natural gas producer in the country. In particular, the acquisition will significantly raise EQT Corp.’s core acreage positions in the Marcellus and Utica shale plays.

Post-acquisition, EQT’s average daily natural gas sales volumes will surge to 3.6 billion cubic feet equivalent (Bcfe) from 1.3 Bcfe. Moreover, EQT Corp. and Rice Energy are among the low-cost producers of natural gas in the U.S shale resources. The acquisition will probably help the combined entity further lower operating cost and might also realize cost synergy of $2.5 billion. (Read more: EQT to Be Largest Natural Gas Producer on Rice Energy Deal.)

2.    Chevron Corp. welcomed the recent verdict of the U.S. Supreme Court, which immunized the integrated energy giant from the payment of a landmark $9.5 billion fine for a pollution related case in Ecuador.

Residents of Ecuador alleged that Texaco – subsidiary of Chevron – let out wastewater into open pits across vast swaths of Lago Agrio region. A case pertaining to the same was filed in the U.S. However, the same was dismissed and Ecuadorian plaintiffs and the American lawyer Steven Donziger had to refile the case in 2011 in Ecuador wherein Chevron was ordered to cough up $9.5 billion as a penalty.

Chevron believed that the judgment in the Ecuador court was a result of fabricated evidence and fraudulence. The company, which currently carries a Zacks Rank #3 (Hold),alleged that Donziger and his associates have fabricated the writing of a key environmental report. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

U.S. District Judge Kaplan in Manhattan did not implement the judgment in 2014 on grounds of bribery. The New York-based 2nd U.S. Circuit Court of Appeals upheld Kaplan's decision last year, citing "a parade of corrupt actions" by Donziger and his associates. (Read more: Chevron Spared of $9.5B Fine in Ecuador Case by US Court.)

3.    Global exploration & production company Hess Corp. (HES - Free Report) recently inked a deal with Permian Basin’s largest operator, Occidental Petroleum Corp. to sell stakes in some enhanced oil recovery assets in West Texas and New Mexico.

Per the deal, Hess will be selling stakes in four different properties in the Permian Basin. It will divest a 34.2% interest in Seminole-San Andres unit, a 46.6% interest in the Seminole Gas Processing plant, a 9.9% interest the Bravo Dome unit and its entire stake in the West Bravo Dome CO2 field. These assets produced an average of 8,200 barrels of oil equivalent per day in 2016.

Hess will receive $600 million from this divestment deal. The proceeds from the sale will be utilized to provide an impetus to growth both nationally and globally. The amount will also be used by Hess to fund the first phase of development in the Liza field off Guyana, which the company had sanctioned a few days back.

Subject to regulatory approvals and satisfactory closing conditions, the deal is scheduled for closure in August. (Read more Hess Inks $600M Deal to Divest Stakes in Permian Holdings.)

4.    The world’s largest publicly traded oil company ExxonMobil Corp. (XOM - Free Report) has made its final investment decision (‘FID’) regarding the first phase development of the Liza field located off the coast of Guyana, among the largest oil finds of the past decade.

The FID involves completion of a floating production, storage and offloading (‘FPSO’) vessel capable of producing up to 120,000 BOPD. Production at Liza is likely to start by 2020. The company projects the cost of this phase to be slightly above $4.4 billion including a lease capitalization cost of around $1.2 billion for the FPSO facility. The facility is expected to generate approximately 450 million barrels of oil equivalent from the Liza field, located at a water depth of1500–1900 meters.

Apart from contributing significantly to ExxonMobil’s future oil and gas output, the development of Liza phase 1 can also produce substantial benefits for the country in the form of job creation, specialized workforce training, increasing government revenues and others.

The 6.6 million acres Liza field is a part of the Stabroek Block. ExxonMobil holds 45% operating interest here while Hess Corp. and CNOOC Ltd.’s wholly-owned subsidiary Nexen own 30% and 25% interest, respectively. (Read more: ExxonMobil Moves Ahead with Liza Project Offshore Guyana.)

5.    The proposed merger between oilfield services provider Baker Hughes Inc. and industrial conglomerate General Electric Co. has been cleared by The Australian Competition and Consumer Commission (’ACCC’).

On Jun 12, the U.S. Justice Department approved the merger on the condition that General Electric will divest its GE Water business. The Australian regulators believe that the GE Water sale will ensure that the combined entity does not stifle competition in the market. It is to be noted that Baker Hughes and General Electric, through GE Water, are the potential suppliers of refinery process chemicals in Australia.

The companies also received merger authorization from the European Commission on May 31.

In Oct 2016, Baker Hughes and General Electric had signed an accord to form the world’s second largest oilfield service player. Per the deal, the oil and gas business of General Electric will merge with Baker Hughes to create a new entity – "New" Baker Hughes – which will likely rake in combined revenues of $32 billion. The combined entity is expected to have operations in more than 120 countries. (Read more: Baker Hughes & GE Electric Merger Gets ACCC Clearance.)

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

+3.00%

-7.13%

CVX

+2.80%

-7.90%

COP

+7.05%

-10.02%

OXY

+2.35%

-13.72%

SLB

-0.64%

-21.49%

RIG

-0.92%

-44.74%

VLO

+5.62%

-1.30%

TSO

+3.35%

+3.89%

Over the course of last week, the Energy Select Sector SPDR – a popular way to track energy companies – rose by 1.72%. The best performer was multinational oil company ConocoPhillips (COP - Free Report) whose stock price jumped 7.05%.

But longer-term, over the last 6 months, the sector tracker is down 13.44%. Offshore drilling powerhouse Transocean Ltd. was the major laggard during this period, experiencing a 44.74% price decline.

What’s Next in the Energy World?

Market participants will be closely tracking the regular releases i.e. the U.S. government statistics on oil and natural gas. Energy traders will also be focusing on the Baker Hughes data on rig count.

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