Oil & Gas Stock Roundup: Shell Mulls $40B Spin-Off, Range Resources To Buy Rival

It was a week where oil prices hit a fresh six-month high but natural gas barely budged.

On the news front, Royal Dutch Shell (LON:RDSa) plc RDS.A is toying with the idea of a $40 billion spin-off of non-core assets, while Range Resources Corp. (NYSE:RRC) agreed to acquire Memorial Resource Development Corp. in a $4.4 billion deal.

Overall, it was a mixed week for the sector. While West Texas Intermediate (WTI) crude futures gained 3.5% to close at $46.21 per barrel, natural gas prices remained essentially unchanged at $2.096 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Shell, EOG Withstands Crude Crash to Q1 Beat.)

Oil prices moved north for the fifth time in 6 weeks on supply disruptions in Nigeria and Libya. A report by Paris-based International Energy Agency (IEA), projecting the global oil inventory overhang to fade notably in the second half of the year, also propped up the commodity. Things were further helped by the Baker Hughes report that showed another drop in oil-directed rigs - indicating a break in shale drilling activities.

On the other hand, natural gas stayed flat after an encouraging inventory report was offset by mild temperatures across most parts of the country that restricted the commodity’s requirement for power burn.

Recap of the Week’s Most Important Stories

1. Europe’s largest oil company Royal Dutch Shell plc is contemplating the sale of non-core assets worth $40 billion via a stock exchange listing in order to strengthen its cash position to repay debts and meet future investment commitments.

In Feb 2016, Shell closed a $50 billion merger with BG Group (LON:BG) plc − a leading upstream energy player in the UK. The transaction was completed just weeks after a massive decline in oil prices to a 13-year low of nearly $27 a barrel. Post the merger, the company’s long-term debt burden increased to the current level of around $73 billion, while its liquidity declined.

Meanwhile, management is planning an initial public offering (IPO) of the company’s mature assets in order to benefit from a sustained oil price recovery and refocus on core assets. The new entity, referred to as “Baby Shell”, will likely consist of upstream assets in the UK, Norway, New Zealand, Italy and Nigeria. Also, the confirmation of an IPO is expected within the next 12 months.

2. Natural gas producer Range Resources Corp. has agreed to acquire smaller rival Memorial Resource Development Corp. for $4.4 billion, including the assumption of $1.1 billion in debt.

Under the terms of the agreement, Memorial shareholders will receive 0.375 shares of Range Resources’ common stock for each share they hold. This offer values Memorial shares at a 17% premium to the pre-announcement closing price. The transaction has been okayed by the boards of both companies but awaits regulatory and shareholder approval. We expect the buyout to conclude in the second half.

If the deal goes through, Range Resources will be able to add Memorial’s North Louisiana operations to its projects in the Appalachian basin.

3. Premier energy infrastructure provider in North America, Williams Companies Inc. (NYSE:WMB) has filed a suit against Energy Transfer Equity L.P. to ensure that their merger remains on track. The company took the legal step when the latter expressed concerns over the merger citing that the deal had not secured the necessary legal opinion to make the transaction tax-free to shareholders.

Williams sued Energy Transfer Equity in the Delaware Court of Chancery to prevent the latter from canceling the merger over tax issues, so that the deal materializes on Jun 28 as scheduled.

The deal – originally valued at $33 billion – has been watered down to $14 billion due to sharp decline in oil prices. However, the cash component of $6 billion has not changed, making the pending merger a nightmare for Energy Transfer Equity. As such, it is suffering from buyer’s remorse and is searching for ways to escape the deal in deteriorating financing markets. (See More: Williams Sues Energy Transfer Equity over Merger.)

4. Oil giant BP plc (LON:BP) (NYSE:BP) has increased its stake by twofold in the Maersk Oil-operated Culzean high-pressure high-temperature development in the UK Central North Sea, following the acquisition of an additional 16% interest from JX Nippon Exploration & Production.

As a result of this acquisition, BP’s interest in the development has augmented to 32% from 16%. The Culzean field development was approved at the end of Aug 2015. It is estimated to produce adequate gas to meet 5% of total UK demand at peak production from 2020−21.

The gas condensate field, discovered in 2008, is scheduled to come online in 2019. The field’s production life is projected to continue into the 2030s. During its plateau, it is estimated to produce 60,000−90,000 barrels of oil equivalent per day. The field is expected to hold reserves of about 250−300 million barrels of oil equivalent. (See More: BP's Interest in Culzean Field Development Rises by Twofold.)

5. U.S. energy major Chevron Corp. (NYSE:CVX) announced that it is planning to reduce its workforce by 800 in the Thailand region amid low oil prices. The company intends to make savings of $500 million in costs so as to continue its operations in Thailand. This is in sync with the company’s late last year’s announcement of a significant headcount reduction plan at its upstream business.

The job cut, which is expected to be effective from Aug 1, is in addition to the layoff of around 100 employees earlier this year. In Thailand, Chevron has around 2,200 staff and 1,700 contractors, and caters to about half of the country's natural gas demand.

Notably, Chevron is in discussions with the Thai government to extend concessions for several oil and gas license blocks which it operates in the Gulf of Thailand beyond the 2022 expiration date. Chevron expects the government to take a decision by early 2017.

Price Performance

The following table shows the price movement of the major oil and gas players over the past week and during the last 6 months.

Over the course of last week, ‘The Energy Select Sector SPDR’ was up 2.75% on diminishing inventory overhang. Consequently, investors witnessed a buying spree in most large companies. The best performer was Houston-based energy major ConocoPhillips (NYSE:COP) that added 5.68% to its stock price.

Longer-term, over the last 6 months, the sector tracker is down 3.07%. offshore drilling giant Transocean Ltd. (NYSE:RIG) was the main casualty during this period, experiencing a 34.67% price decrease.

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. And with the 2016 Q1 earnings season winding down, oil prices will again guide market proceedings to a significant extent.