Oil & Gas Stock Roundup: Transocean, Chevron & More

It was a week where both oil and natural gas prices suffered losses.

On the news front, Swiss rig behemoth Transocean Ltd. (NYSE:RIG) confirmed the acquisition of Norwegian rival Songa Offshore in a $3.4 billion deal, while supermajor Chevron Corporation (NYSE:CVX) dropped an appeal to Australia's High Court over a landmark tax dispute.

Overall, it was a dismal week for the sector. West Texas Intermediate (WTI) crude futures edged down 0.6% to close at $48.51 per barrel, while natural gas prices declined about 3% to $2.893 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Andeavor Logistics & Nabors' Acquisitions, BP (LON:BP)'s Project Start-Up & More .)

Despite a hefty inventory draw, oil prices recorded another weekly decline. The U.S. Energy Department's inventory release showed that crude stockpiles recorded their biggest drop since September on continued strong refinery runs. With oil supplies falling for the seventh week, investor sentiment has turned slightly positive on dissipating fears about a meltdown to sub-$40 levels. Analysts also believe that the trend, if sustained, could help tighten the market significantly. The commodity got further fillip from the reduction in U.S. rig count (number of rigs searching for oil) for the second week in three.

However, these positive effects were more than offset by the steadily rising domestic oil output that continues to be the biggest headwind for the market. At 9.502 million barrels a day, production is at the highest level in more than two years, thereby cancelling out cuts from OPEC and its allies. Surprise builds in refined product inventories – gasoline and distillate – added to the pessimism.

Meanwhile, natural gas dropped following a larger-than-expected increase in supplies. Adding to the bearish sentiment, the build outpaced the five-year average for the first time in six weeks. Investors were also keen to book profits after surges over the prior two weeks.

Recap of the Week’s Most Important Stories

1. Shares of the offshore drilling giant Transocean slumped after the company announced plans to acquire Norway-based drilling contractor Songa Offshore for $3.4 billion - the most expensive deal in the offshore drilling industry since the three-year oil slump period. The decline reflects the investors’ apprehension as the deal is likely to worsen the near-term credit metrics of Transocean by increasing debt by more than 35% and reduce cash by 20%.

Though the transaction will be adversely affecting the near-term financials of Transocean, it is expected to boost its long-term opportunities in the Norwegian market and enhance the company’s position in the offshore drilling industry and help the company penetrate deep-and harsh-water markets. The company expects annual cost and operational synergies of around $40 million from the deal.

Songa’s complementary assets and strong fleet quality will strengthen Transocean’s portfolio, An expanded fleet, serving a larger customer base across a wide geographic footprint, is expected to open up future revenue growth opportunities. The deal is also expected to boost the backlog of the combined entity by over 40%. (Read more Sanchez Energy Divests Eagle Ford Shale Asset for $105M .)

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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 -3.2% return last week. The worst performer was offshore drilling rig operator Transoceanwhose stock fell by 8.7%.

Longer-term, over the last 6 months, the sector tracker lost 14.4%. It was again Transocean, which was the major laggard during this period, experiencing a 45.7% 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 - 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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