Oil & Gas Stock Roundup: Cheniere Starts Korea Gas Export, Jones Energy Sells Non-Core Assets

It was a week where oil prices plunged into bear territory amid continued U.S. production boom, while natural gas futures slipped below the psychologically important $3 threshold.

On the news front, Cheniere Energy Inc. LNG announced the dispatch of the first cargo of liquefied natural gas under its 20-year contract with South Korean government-owned KOGAS, while oil and gas explorer Jones Energy Inc. JONE struck a deal to offload several non-core assets in Arkoma basin to pay down debt.

Overall, it was a brutal week for the sector. West Texas Intermediate (WTI) crude futures lost 4.4% to close at $43.01 per barrel, while natural gas prices fell 3.6% to $2.929 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: EQT-Rice Energy Tie-Up, Chevron's $9.5B Legal Reprieve & More)

Oil prices sank to their lowest finish since Aug 10, spooked by the U.S. Energy Department's inventory release. The report once again brought to the forefront the steady trend of rising domestic oil production that continues to be the biggest headwind for the market. At around 9.35 million barrels a day, domestic output has increased to the highest since Aug 2015. Investors also fretted over the burgeoning rig count – pointing to the ever-increasing shale drilling activities – and rising output from Libya.

Meanwhile, natural gas futures fell to its lowest since March following a larger-than-expected increase in supplies and tepid cooling demand with forecasts of milder temperature across the country over the next few days.

Recap of the Week’s Most Important Stories

1.    U.S.-based natural gas exporter Cheniere Energy Inc. recently commenced work under its long-term supply contract with South Korean natural gas utility Korea Gas Corp., aka, KOGAS. The first shipment – loaded on Jun 3 – is in transit from Sabine Pass to South Korea’s Tongyeong and is likely to arrive on Jul 1.

The 20-year supply contract, inked in Jan 2012, aims to supply U.S.-sourced LNG from the Sabine Pass Liquefaction facility in Louisiana to KOGAS. Per the deal, Cheniere Energy is expected to deliver about 3.5 million tons of LNG per year which is 10% more than South Korea’s total annual demand.

South Korea depends heavily on Middle Eastern countries including Oman and Qatar for its import requirements through state-run KOGAS. The country is the second-largest LNG importer in the world due to the paucity of domestic resources to meet its energy demands.

With the energy production boom in U.S., the nation is likely to become the world’s largest LNG supplier by 2035, transcending Australia and Qatar. Cheniere Energy, which is the only LNG exporter of U.S., is expected to ship 200 LNG vessels this year. The company exports natural gas to around 20 countries. The gas contract with KOGAS is likely to generate over $548 million of revenues for Cheniere Energy per year. (Read more: Cheniere Energy Initiates Work under KOGAS LNG Supply Deal)

2.    Texas-based upstream company Jones Energy Inc. recently entered into divestment agreements to offload its non-core properties in Arkoma Basin to undisclosed buyers in order to augment its balance sheet. With the divestment deal, the company –currently carrying a Zacks Rank #3 (Hold) – will exit the Arkoma Basin which represents just 6% of the company’s projected 2017 revenues. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The company has 277 gross drilling locations and 45 net drilling locations on 12,383 leased acres in Arkoma Basin The production capacity of these properties average over 3,000 barrels of oil equivalent per day – mostly natural gas and natural gas liquids.

The total consideration of the deal is valued at $67.5 million. Jones Energy is likely to receive cash payment of $65 million and up to $2.5 million contingent payment based on improving natural gas prices. The proceeds are expected to be used to repay debt under its revolving credit facility. Subject to regulatory approvals and satisfactory closing conditions, the Arkoma transaction is scheduled to close in the third quarter of 2017.

The company sold other non-core assets worth $2.5 million in early 2017. With the current deal, the total divestitures of the company have amounted to $70 million so far this year. The deal is in sync with the company’s strategy to reduce debt and focus on ramping up activities in the Merge play in the prolific Anadarko basin.(Read more: Jones Energy to Divest Non-Core Properties in Arkoma Basin)

3.    Texas-based oil and gas producer Sanchez Energy Corp. SN recently divested its Eagle Ford Shale Marquis asset to Fort Worth based energy company Lonestar Resources US Inc. for $50 million cash and preferred stock of the later. The stock will be converted into 1.5 million common shares.

Marquis is located in the eastern part of the Eagle Ford Shale spanning roughly 21,000 net acres in Fayette and Lavaca counties, TX. It has 2.7 million barrels of oil equivalent (BOE) proven reserves with around 1,750 BOE per day net production. As much as 74% of the production is oil that is extracted from more than 100 wells.

Sanchez Energy's divestment of the non-core Marquis asset is in line with the strategy of improving its liquidity and financial condition - currently under stress with a debt load of approximately $1.9 billion. The acquisition of $2.3 billion Eagle Ford assets from Anadarko Petroleum Corp. the beginning of 2017 with The Blackstone Group L.P. as partner has also put the company in a tough spot financially.

The transformation of the underutilized non-core asset into cash will help the company to focus on the growth of the Comanche, Catarina and Maverick areas of the Western Eagle Ford, which brings much higher returns than the eastern part. The company has acquired over 340,000 net acres here. (Read more Sanchez Energy Divests Eagle Ford Shale Assets for $50M)

4.    Shares of Canadian oil company Cenovus Energy Inc. CVE fell 8.6% to eventually close at $7.12 on Jun 20. The decline followed the announcement of the retirement of the company’s CEO along with the much-criticized deal with independent oil producer ConocoPhillips COP.

Brian Ferguson – the current CEO of Cenovus – has led the company since 2009, after the company’s spun off from Encana Corp. Ferguson’s decision to enter into the massive acquisition with ConocoPhillips has overleveraged the financials of the company, while his plans of dividend cuts have drawn much censure.

Cenovus’ $13.3 billion acquisition deal has loaded the company with massive debt and crushed its share price. Shares of the company plummeted by more than 40% over the past three months post the announcement of the acquisition deal with ConocoPhillips. Amid such a backdrop, investors remain deeply skeptical about the stock.

The company announced plans to unload non-core assets worth around $5 billion which to finance the ConocoPhillips acquisition deal. Cenovus is likely to close all the divestment agreements for its legacy conventional portfolio by the end of this year. The assets include the company’s Pelican Lake and Suffield holdings along with Palliser asset in Alberta and the Weyburn project. Together, all these assets have a production capacity of 112,000 barrels of oil equivalent per day. (Read more: Cenovus Hit by CEO Retirement, ConocoPhillips Deal Plans)

5.    Brazil oil giant Petrobras PBR recently approved to settle a shareholder lawsuit filed by investment management company The Vanguard Group, Inc. to recoup the losses related to the corruption charges against the company.

Numerous lawsuits have been filed against the state-run company due to its involvement in the massive corruption scandal and multibillion-dollar money laundering. Various senior executives of the company have been accused of taking bribes for inflated contract schemes.

Vanguard is Petrobras’ biggest shareholders after the federal government and other Brazilian agencies. Though Petrobras assured Vanguard that it shall remain transparent in all its dealings and transactions related to growth plans, the company got involved in corruption and concealed corruption schemes.

Vanguard alleged that the company overstated the value of assets and manipulated earnings. This led to huge losses for shareholders. The lawsuits filed by Vanguard will help to recuperate losses from various money laundering and bribery schemes tied to company contracts. The settlement of the cases would resolve uncertainties, costs and potential liabilities associated with the disputes. (Read more: Petrobras Board Okays Vanguard Lawsuit Settlement)

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

-0.54%

-8.81%

CVX

-1.28%

-10.16%

COP

-0.99%

-13.34%

OXY

+0.45%

-15.02%

SLB

-2.77%

-21.85%

RIG

-6.81%

-46.45%

VLO

+2.58%

-2.89%

TSO

+1.96%

+3.42%

Over the course of last week, the Energy Select Sector SPDR – a popular way to track energy companies – fell by 2.29%. The worst performer was offshore drilling powerhouse Transocean Ltd. RIG whose stock price fell 6.81%.

Longer-term, over the last 6 months, the sector tracker is down 14.96%. It was again Transocean, which was the major laggard during this period, experiencing a 46.45% 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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Petroleo Brasileiro S.A.- Petrobras (PBR): Free Stock Analysis Report
 
Cenovus Energy Inc (CVE): Free Stock Analysis Report
 
Transocean Ltd. (RIG): Free Stock Analysis Report
 
Sanchez Energy Corporation (SN): Free Stock Analysis Report
 
Jones Energy, Inc. (JONE): Free Stock Analysis Report
 
Cheniere Energy, Inc. (LNG): Free Stock Analysis Report
 
ConocoPhillips (COP): Free Stock Analysis Report
 
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