Oil & Gas Stock Roundup: Chesapeake to Spin-Off Unit, Encana Reports Strong Q1 - Analyst Blog

Crude prices climbed back above $102-a-barrel past week on positive U.S. economic data and the continued Ukraine impasse, while natural gas continued its downtrend amid another big storage build that eased worries about an imminent supply shortfall.

Among the newsmakers, natural gas producer Chesapeake Energy Corp. CHK announced plans to spin-off its oilfield services business in an attempt to streamline itself, while Canada's Encana Corp. ECA came out with robust first quarter results.     

Crude Oil:

Crude prices got a boost from the latest housing and jobless claims numbers, providing further evidence that the U.S. economy is coming out of its winter freeze. This has fueled hopes for robust fuel and energy demand in the world's biggest oil consumer.

The positive momentum was further propelled by IEA's upward revision to its 2014 global oil demand forecast and the approaching summer driving season that would provide a fillip to gasoline consumption. Geopolitical forces too played their part in supporting crude prices, with news of renewed tension in Libya, and continued confrontation between Moscow and the West that threatens to derail hydrocarbon supplies from Russia.

However, the bulls were somewhat offset by an unexpected spike in crude inventories, while domestic production still remains in record territory. Concerns over Chinese demand slowdown and Euro-zone's economic growth has also been a drag on prices.

As a result of these factors, by close of trade on Friday, West Texas Intermediate WTI oil settled at around $102.02 per barrel, gaining 1.7% for the week.    

Natural Gas:

Natural gas extended losses from the previous week on the back of a bearish supply data and predictions of neutral weather across certain regions of the country.

The EIA's weekly inventory release showed that natural gas stockpiles held in underground storage in the lower 48 states rose by 105 billion cubic feet (Bcf) for the week ended May 9, above the guided range (of 97–101 Bcf build). Moreover, the latest build – the sixth on the trot and the fourth successive above consensus injection – went a long way in easing fears about the timely replenishment of the inventories ahead of the next heating season, starting from November.

To make things worse, mild springtime temperature forecasts – in the country's Northeast and Midwest over the next few days – are likely to limit natural gas' early season cooling demand.

Influenced by these factors, natural gas prices ended Friday at $4.41 per million Btu (MMBtu), down 2.6% over the week.

Energy Week That Was:

The week's energy coverage was dominated by the following news:

Chesapeake Slides on Plans to Spin Off Oilfield Service Business

U.S. gas giant Chesapeake Energy Corp. ended last week on a slippery note, as the spin-off announcement for its oilfield services business – Chesapeake Oilfield Operating LLC – dragged its shares down by almost 2.5% on May 16. The proposed restructure is in line with the company's ongoing strategy of shifting focus from natural gas drilling to liquids production. Involved in drilling, hydraulic fracturing, rig relocation, and other related services, the to-be-divested business generated revenues of $2.2 billion last year.

Post spin-off completion, which is likely to be by June, the new unit would be christened Seventy Seven Energy Inc. Per company estimates, the oilfield services business would at one go take away $1.1 billion of debt from its books.

Encana Beats on Q1 Earnings

Canadian energy explorer Encana Corp. saw its shares jump 6% after reporting strong first quarter results. The predominantly natural gas producer beat estimates on the back of high commodity prices and lower operating expenses. On the production front, liquids output climbed 56% from the first quarter of 2013, while gas volumes fell 2%. The Calgary, Alberta-based company guided towards capital spending of $2.4–$2.5 billion this year, while lowering its 2014 total production expectation to reflect the Wyoming asset sales. 

Core Labs Guides Lower for Q2 & '14, Shares Fall 

Shares of oilfield services provider Core Laboratories N.V. CLB crashed 12% after it lowered second quarter EPS range to $1.32–$1.35 from its previous projection of $1.48–$1.53. The company also reduced its 2014 EPS guidance to $5.80–$6.00 from $6.00–$6.25. Projected revenues were cut back too, with $265–$270 million now estimated for the second quarter instead of $280–$286 million before, while full year projections were trimmed to $1.1 billion from $1.16–1.18 billion.

Core Labs revealed that its North American customers expect less-than-anticipated reservoir fluids levels from developed unconventional resources in Bakken, Marcellus, Niobrara, Montney and Eagle Ford formations, compelling the company to lower its EPS and revenue guidance.

Anadarko Hikes Quarterly Dividend

The board of directors of Anadarko Petroleum Corp. APC announced an impressive 50% hike in the quarterly dividend rate. The new quarterly dividend comes to 27 cents per share, up from 18 cents per share in the prior quarter. The latest hike – the second in less than a year – comes on the heels of Anadarko Petroleum's strong performance in the first quarter 2014 thanks to the upbeat production results from its U.S. onshore plays.

ConocoPhillips Reaffirms Double-Digit Returns

At its ‘Annual Stockholders  Meeting', world's largest independent energy explorer and producer – ConocoPhillips COP – reiterated its target of delivering double-digit returns annually to shareholders by growing production and margins by 3% to 5% a year and offering a steadily increasing dividend. The company plans to increase output by maintaining its focus on growth in reserves, through global drilling programs in legacy assets, unconventional assets and major projects.

ConocoPhillips' margin growth drive would also be helped by its shift of production mix to higher-value products. The company expects to spend $16 billion per year on an average, allocating 95% of the total to investments that deliver above-average margins.

Performance Chart of Some Major Companies:

The following table shows the price movement of the major oil and gas players over the past 5 days and during the last 6 months.

Other Headline News on Energy:

National Oilwell Ups Dividend by 77%

Global large-cap energy equipment maker, National Oilwell Varco Inc. NOV increased in its quarterly cash dividend to 46 cents per share ($1.84 annualized), up almost 77% from 26 cents. Earlier in the week, the company announced that the spin-off of its distribution business, NOW Inc., has received the approval to be listed on the NYSE. The new entity – to come into effect after the close of trade on May 30 – will be trading under the symbol DNOW. For every four shares of NOV, one share of the new entity will be issued to stockholders.

Apache Hikes Share Repurchase Plan

U.S. energy firm Apache Corp. APA declared that its board of directors has approved an additional buyback of 10 million shares, thereby increasing the quantum to 40 million. The company has already shelled out some $2.1 billion to repurchase 24.3 million shares under its previous 30 million share buyback program.

HollyFrontier Ups Dividend by 6.7%

Downstream operator HollyFrontier Corp. has increased its quarterly cash dividend by 6.7% to 32 cents per share ($1.28 per share annualized). This marks the sixth dividend hike for the company since it came into existence after the merger of Holly Corp. and Frontier Oil Corp. in July 2011. HollyFrontier also declared a special cash dividend of 50 cents per share.

This Week's Outlook:

Apart from the usual releases – the U.S. government data on oil and natural gas – market participants will be tracking Wednesday's monetary policy meeting by the Federal Reserve. Energy traders will also be focusing on developments in Ukraine.

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