Weekly Energy Market Review

Weekly Energy Market Review

This week's Energy Market Summary for the week ending February 2, 2018:
  • US economic growth forecast tops 5%
  • Inflation rears its ugly head
  • Atlanta Fed spooks equity markets
  • US dollar finds a floor, for now
  • Oil prices take a pause
  • Cdn heavy oil discount tops US$30
  • Oil rig counts creep higher
  • US energy stocks return to earth
  • Big Oil earnings - the hits and misses.
QUICK LINKS
MARKET OVERVIEW
CURRENCIES & BONDS

This week's Canadian economic data:

  • Real GDP increased 0.4% in November, with growth seen in most sectors of the economy. Oil and gas extraction expanded 1.6% for the month, led by a 3.7% growth in the oil sands. However, oilfield services contracted in November.
  • Lower crude oil and gasoline prices dragged on both the Industrial Product Price Index (IPPI) and Raw Materials Price Index (RMPI), falling 0.1% and 0.9% in December, respectively.

In treasury markets this week:

  • US bond yields shot up again on the release of more positive economic data south of the border. After a 160,000 gain in December, the US economy added 200,000 jobs in January, slightly better than economists were expected. Hourly earnings are now up 2.9% for the year, the highest since 2009. Labour costs jumped 2% in the fourth quarter, sparking further inflation concerns.
  • The Atlanta Fed revised estimates for US first quarter GDP from 4.15% to a whopping 5.4%, on strong consumer spending, a pick up in manufacturing and private fixed-investment growth. The news virtually guarantee several more rate hikes this year, sending equity markets plunging on Friday. The US yield curve steepened considerably this week (10 vs 2yr), as bond markets start to price in a strengthening US economy.
  • German 10-year yields also spiked, hitting a 2-year high on the release of more positive economic data out of the Eurozone and a slight uptick in inflation. Yields in the UK are also returning to their pre-Brexit levels.
  • The Bank of Japan tried (and failed) to keep a lid on interest rates, increasing its purchase of JGB bonds in an attempt to bring 10-year rates back to zero. Japanese yields touched 0.1% on Thursday. 

This week's worst performers on currency markets include the Aussie dollar (-2.2%) and the Japanese yen (-1.5%). The Euro continues its upward trend, gaining another 0.25% for the week.

OIL & GAS PRICES (USD)

Oil prices took a pause this week, declining slightly on Friday as the US dollar strengthened. Western Canadian Select (WCS) remains under pressure due to a widening discount to WTI. The differential widened another US$3 this week to about US$30.50 per barrel. For the month of January, the WCS discount to WTI averaged US$26 a barrel, up from US$22.40 in December.

The spread between Brent and WTI narrowed again this week, falling to about US$3 a barrel. Backwardation on the WTI curve continues to steepen.

Monthly average oil prices for January are as follows (change m/m):

  • Brent: US$69.02 +7.7%
  • WTI: US$63.66 +9.9%
  • Canadian Light: US$56.49 +8.4%
  • Western Canadian Select: US$37.66 +5.9%

Natural gas prices took a sharp leg lower due to expiration of the February contract. Natural gas futures remain in backwardation for the April contract, but then move back into contango. For the month of January, Henry Hub averaged US$3.16 per MMBtu, up 14% from December. Alberta's AECO gas averaged US$1.58, up 5.6% from the previous month.

Goldman Sachs revised its 2018 Brent price forecast to US$75, US$82.50 and US$75 for the first quarter, first half and full year, respectively. The bank says it sees prices rising into the summer as global inventories decline, but dipping towards the end of the year due to rising supply from OPEC and non-OPEC sources.

CRUDE OIL FUTURES CURVES (USD/BBL)
BRENT
WTI
█ OIL PRICE (USD/BBL)   █ MONTH 3   █ MONTH 5 (VS NEAR MONTH)
MANAGED MONEY FUTURES & OPTIONS (1000 BBL CONTRACTS)
BRENT
WTI
█ OIL PRICE (USD/BBL)   █ LONG   █ SHORT █ NET LONG

The number of oil rigs operating in the US rose by 6 this week to 765, its highest level since last summer. Canada added another 14 rigs, bringing the total to 234.

 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

JAN 31, 2018

US crude inventory drawdowns slam into reverse after 10 weeks of declines

 
What's moving energy markets this week:

FACTOR
IMPACT
   SUMMARY
GEOPOLITICS
NEUTRAL
  • Reuters is reporting clashes between Libyan forces and rebel groups this weekend near the prolific Waha oilfield. Production and exports are so far unaffected.
USD INDEX
NEUTRAL
  • The US dollar slid lower for much of the week before rebounding sharply on Friday. The greenback seems to have found a floor, at least for now.
SUPPLY
▼ BEARISH
  • Crude output from the US and Canada continues to show signs of significant expansion. The EIA estimates US crude production hit a 47-yr high of 10 million bbl/day last November. North American rig counts have been slowly creeping higher through the end of January.
  • According to Reuters, OPEC output was roughly unchanged in December versus the previous month.
DEMAND
▲ BULLISH
  • Both the Eurozone and the US economies continue to show signs of strengthening, which should support demand growth from developed nations, which has been virtually non-existent in the past decade.
  • For the first time in several months, US crude inventories rose last week as Gulf Coast refineries begin maintenance turnarounds. However, the EIA is reported strong demand for refined products in the US.
SENTIMENT
▼ BEARISH
  • After hitting a record high the previous week, net longs on both Brent and WTI eased slightly.
  • After hitting a low in mid-December, the crude oil Volatility Index is starting to show signs of pick-up, indicating some nervousness among traders.
EQUITY MARKETS

Equity markets around the world took a much needed breather as traders digest the impacts of rising global interest rates. US markets led the declines, particularly large caps. The Dow Jones Industrial Average shaved-off over 1,000 points this week, returning to the levels of mid-January. In contrast, the TSX has sunk back to the levels of last fall.

TSX SECTORS
S&P 500 SECTORS
52-WK RANGE
52-WK RANGE

Toronto's TSX suffered its worst decline since August 2016, due in part to a complete collapse of high-flying cannabis stocks, knocking the healthcare sector lower by 17%. Outside of healthcare, energy and materials were the worst performers, falling 7.4% and 6.0%, respectively.

Losses on the S&P 500 were more broadly based, with energy and materials also leading the declines.

ENERGY SECTOR PERFORMANCE
ENERGY SUB-SECTORS (weighted by market cap)
TSX ENERGY
S&P 500 ENERGY
█ INTEGRATED  █ MIDSTREAM  █ E&P LG CAP █ E&P MD CAP  █ E&P SM CAP  █ SERVICES  █ REFINERS

All energy subsectors ended the week lower, with smaller cap names leading the declines.

Analysts at RBC Capital markets say US refiners will "benefit substantially" from recent changes to the tax code. The bank expects refiners will be able to grow earnings by about 15%, adding about US$3.0 to US$3.5 billion in free cash flow. RBC also says it doesn't expect much impact to E&Ps, since most don't pay taxes, while impacts to integrated stocks will be muted since their effective tax rate is already quite low. Midstream and oil field service stocks are also expected to benefit in the long run.


TSX ENERGY STOCKS
TSX 300 ENERGY STOCKS

TD Securities says it expects a strong showing in upcoming fourth quarter earnings, as higher oil prices should translate into higher cash flow, upward revisions in 2018 guidance and reserves and potentially additional hedging. TD is maintaining a Market Weight stance on the Canadian energy sector. Among the more "oily" names, TD says Canadian Natural Resources (CNQ) and Whitecap Resources (WCP) should be core holdings, while Raging River Exploration (RRX), Spartan Energy (SPE), and Encana (ECA) offer the best growth prospects.

This week's notable Canadian investment news:

  • Obsidian Energy (OBE) announced the sale of several "non core legacy assets," reducing the company's decommissioning liabilities by $25 million. The assets produce about 2,200 boe/day, weighted 25% liquids. Once the sale is completed, Obsidian says netbacks will be improved by $1.50 boe/day, while liquids weighting rises to 65%. Full year 2018 guidance was revised to about 30,000 boe/day.
  • At its Investor Day meeting this week, Gibson Energy (GEI) announced plans to divest much of its trucking and environmental services divisions, instead focusing its business on oil infrastructure. The company says it wants to grow free cash flow by 10% annually, which should translate into dividend growth.
  • BlackPearl Resources (PXX) says its 6,000 bbl/day Phase 2 expansion at Onion Lake is ahead of schedule and tracking within budget, currently pegged at about $180 million. First steam is planned for February with first oil expected by the summer. The heavy thermal facility averaged about 10,200 boe/day in 2017. Total proved reserves were also increased by 24% to 94.4 million barrels.
  • Bonavista Energy (BNP) says it produced 74,799 boe/day in the fourth quarter of last year, up 5% from the previous quarter. The company says it has replaced 189% of 2017 production with the addition of 49.8 million barrels of oil equivalent in proved plus probable reserves, now totalling 437.7 million boe.
  • Painted Pony Energy (PONY) says production volumes in Q4 averaged 52,500 boe/day, including 4,500 bbl/day of liquids. Volumes were voluntarily reduced by 8,000 boe/day due to low gas prices. For the first quarter of this year, output is expected to average 60,000 boe/day. PONY also announced some changes to its senior management.
  • Prairie Provident Resources (PPR) has set a "fully-funded" 2018 capital budget of $26 million and says it plans to average between 5,200 and 5,600 boe/day this year, a 5% growth rate from 2017. The company also announced a 10% increase to its total proved reserves and liquids rating.

This week's (only) notable fourth quarter earnings results:

  • Imperial Oil (IMO) posted a rare quarterly loss of $137 million despite a 44% increase in operating cash flow, rising to $1.08 billion. Total revenues declined 4.3% to $8.08 billion. The red ink was blamed on a $277 million write-down of its Mackenzie Valley pipeline, a $289 million charge on its Horn River natural gas project, higher operating expenses at Kearl, lower production out of Syncrude and higher royalty payments. Total production was unchanged at 399,000 boe/day while refinery runs dipped slightly to 391,000 bbl/day.

New 52-week lows on the TSX this week was Advantage Oil & Gas (AAV), Bonavista Energy (BNP), Crew Energy (CR), Enbridge (ENB), Enbridge Income Fund (ENF), Enerflex (EFX), Keyera (KEY), Peyto Exploration & Development (PEY), Tourmaline Oil (TOU) and TransCanada (TRP).


S&P 500 ENERGY STOCKS
S&P 500 ENERGY STOCKS

This week's notable US energy investment news:

  • Hess (HES) announced a 2018 capital and exploratory budget of US$2.1 billion, unchanged from last year. Higher capital will be deployed in offshore Guyana and the Bakken, offsetting declines in the Gulf of Mexico and Malaysia.
  • Andeavor (ANDV) announced the purchase of an LNG facility from ConocoPhillips (COP) in Kenai, Alaska. The facility was commissioned in 1969 but ceased operation in 2015. Terms of the deal were not disclosed.
  • Enterprise Products Partners (EPD) and Navigator Holdings (NVGS) announced the formation of a 50/50 joint venture to build a new ethylene export facility along the US Gulf Coast. The petrochemical plant will have an export capacity of 1 million tons/year, expected to be in service by the first quarter of 2020. EPD also announced an offering of US$2.7 billion in notes due in 2021, 2048 and 2078, and the redemption of US$683 million in notes due in 2068.
  • Summit Midstream Partners (SMLP) has launched a non-binding open season for its Double E Pipeline, delivering natural gas to the Delaware Basin to various delivery points in and around the Waha Hub in Texas. The target in-service date is Q1/2021.
  • Magellan Midstream Partners (MMP) has extended binding open season on its proposed 350,000 bbl/day crude oil pipeline from the Permian and Eagle Ford Basins to the Corpus Christi and Houston area. The company says they have seen "significant interest" in the line and the extension provides shippers additional time to finalize their commitments.
  • Noble Energy (NBL) announced plans to divest its 7.5% stake in the Tamar natural gas field offshore Israel to Tamar Petroleum for US$560 million in cash and 38.5 million Tamar shares, bring net proceeds to about US$800 million. The deal will cut Noble's stake in the field from 32.5% to 25%.
  • Shell Midstream Partners (SHLX) announced plans to IPO 25 million shares and sell another $300 million of shares to Shell Midstream Holdings, a wholly-owned subsidiary of Royal Dutch Shell (RDS.A).
  • Eclipse Resources (ECR) says it produced 310.7 MMcfe/day in 2017, up 36% from 2016. The company has set a 2018 capital budget of US$300-$320 million and expects to average 335 to 355 MMcfe/day this year.
  • Ultra Petroleum (UPL) announced the retirement of its CEO Michael Watford at the end of February. Brad Johnson, currently the Senior VP of Operations, was named as interim CEO.

This week's fourth quarter earnings results:

  • ConocoPhillips (COP) swung to a profit in Q4, posting a net income of US$1.58 billion, versus a loss of US$35 million for the same time last year. Full year production averaged 1.356 million boe/day in 2017 (excluding Libya) and is expected to be in the range of 1.195 to 1.235 million boe/day this year. The company set a 2018 capital budget of US$5.5 billion. The company also says it plans to repurchase US$2 billion in COP shares. COP also announced the acquisition of a 22% non-operated stake in the western North Slope of Alaska from Anadarko Petroleum (APC), including its stake in the Alpine pipeline for US$400 million in cash. CEO Ryan Lance reiterated the company's plan to reduce its debt to US$15 billion by the end of 2019.
  • ExxonMobil (XOM) posted a net income of US$8.4 billion, up from US$1.7 billion for the same time last year. Revenues rose 17.9% to US$66.5 billion, much lower than analysts were expecting. The company booked a US$5.9 billion gain on US tax reform. Production declined 3% to 4 million boe/day.
  • Chevron (CVX) reported a 19% increase in Q4 revenues to $37.6 billion, almost 1 billion short of analysts' expectation. Net income was reported at US$3.1 billion, including a US$2 billion gain on US tax reform. Fourth quarter production grew 5% y/y to 2.75 million boe/day. The company also added 1.54 billion boe of proved reserves to its balance sheet.
  • Net income at Valero Energy (VLO) rose to US$2.4 billion in Q4, up from US$367 million for the same time last year. Those figures also include a US$1.9 billion gain for US tax reform. Operating revenues rose to US$26.4 billion, up from US$20.7 billion in Q4/2016.
  • Phillips66 (PSX) reported Q4 earnings of US$3.2 billion, including a US$2.7 billion gain on tax reform. Refining margins improved to US$8.98 a barrel, up from US$6.47 a year earlier. Subsidiary Phillips66 Partners (PSXP) also reported a 60% increase in Q4 earnings, rising to US$162 million.
  • Marathon Petroleum (MPC) says refining margins rose 16% in Q4 to $13.12/bbl, as total revenues rose to US$21.2 billion. Net income rose to US$2.02 billion, up from US$227 million for the same quarter last year. The company also booked a US$1.5 billion gain for US tax reform. Revenues increased 22% to US$20.9 billion. Marathon's MLP (MLPX) also reported an increase in revenues, rising from US$848 million to $1.085 billion in Q4.
  • Murphy Oil (MUR) reported a net loss of US$285 million, including a US$274 million charge related to tax reform. Total revenues rose 12% y/y to US$541 million. The company has allocated US$300 million toward onshore Canadian assets in the Kaybob Duvernay, Placid Montney, and Tupper Montney regions.
  • CNX Resources (CNX) reported a net income of US$282 million, versus a net loss of US$300 million for the same time last year. The company says it expects 2018 production to average 520 to 550 Bcfe, about 31% higher than last year. Capital expenditures are expected to be about US$790 to $880 million. Subsidiary CNX Midstream Parters (CNXM) also reported a 9% increase in net income, rising to US$27 million.
  • Magellan Midstream Partners (MMP) reported a net income of US$238 million for Q4, up 11% from the same time last year. Distributable cash flow also rose 11% to US$308 million.

This week's notable dividend increases:

  • Chevron (CVX) announced a 4% increase to its quarterly dividend payout, rising to US$1.12 per share. This is the company's 31st consecutive annual dividend increase.
  • Marathon Petroleum (MPC) increased its quarterly dividend by 15% to $0.46 per share.
  • ConocoPhillips (COP) raised its dividend 7.5% to US$0.285 per share.
  • Enterprise Products Partners (EPD) raised their quarterly dividend 3.7% to US$0.425 per share.

Across the pond this week:

  • Fourth quarter revenues at Royal Dutch Shell (RDS.A) rose to US$85.4 billion, up from US$65.8 billion for the same time last year, much better than analysts were expecting. Income attributable to shareholders more than doubled to US$3.8 billion due to higher oil prices. Total production declined 4% to 3.756 million boe/day due to their divestment of assets in Canada, the UK North Sea and Gabon.
  • BP (BP) announced a joint-venture with China's Shandong Dongming Petrochemical Group to open up to 500 retail gas stations over the next 10 years. BP already has over 740 retail outlets in China, owned jointly with CNPC and Sinopec. The company says "new market growth" is a key priority.
  • China's state-owned CNOOC (CNU) has set a 2018 production forecast of about 1.3 million boe/day, rising to 1.33 and 1.37 million boe/day in 2019 and 2020, respectively. The company says it produced about 1.28 million boe/day last year.

Concho Resources (CXO) and ExxonMobil (XOM) hit 52-week highs this week, before the big market meltdown on Friday. PetroChina's ADR (PTR) also reached a 12-month high. New 52-week lows include Chesapeake Energy (CHK) and Range Resources (RRC).


UPGRADES & DOWNGRADES

UPGRADES

  • Baker Hughes (NYSE:BHGE): Upgraded from Sell to Neutral at Goldman Sachs Group.
  • California Resources (NYSE:CRC): Upgraded from Sell to Neutral at Goldman Sachs Group.
  • Chevron (NYSE:CVX): Upgraded from Hold to Buy at Societe Generale.
  • DCP Midstream (NYSE:DCP): Upgraded from Sell to Neutral at Goldman Sachs Group.
  • Devon Energy (NYSE:DVN): Upgraded from Market Perform to Outperform at Wolfe Research.
  • Dominion Energy (NYSE:D): Upgraded from Neutral to Buy at Hilliard Lyons.
  • Imperial Oil (TSX:IMO): Upgraded from Underperform to Sector Perform at RBC.
  • Inter Pipeline (TSX:IPL): Upgraded from Sector Perform to Outperform at National Bank Financial.
  • Halliburton (NYSE:HAL): Upgraded from Underweight to Neutral at Atlantic Securities.
  • Helmerich & Payne (NYSE:HP): Upgraded from Hold to Buy at Societe Generale.
  • Kinder Morgan (NYSE:KMI): Upgraded from Hold to Buy at Argus.
  • Petrobras (NYSE:PBR): Upgraded from Sell to Neutral at Goldman Sachs Group.
  • Pioneer Natural Resources (NYSE:PXD): Upgraded from Market Perform to Outperform at Wolfe Research.
  • SRC Energy (NYSE:SRCI): Upgraded from Underperform to Neutral at Credit Suisse Group.
  • Statoil (NYSE:STO): Upgraded from Sell to Neutral at Goldman Sachs Group.
  • Targa Resources (NYSE:TRGP): Upgraded from Neutral to Buy at Goldman Sachs Group.
  • Total Energy Services (TSX:TOT): Upgraded from Hold to Buy at TD Securities.
  • Trinidad Drilling (TSX:TDG): Upgraded from Hold to Buy at TD Securities.
  • WPX Energy (NYSE:WPX): Upgraded from Buy to Conviction Buy at Goldman Sachs Group.

 

DOWNGRADES

  • Helmerich & Payne (NYSE:HP): Downgraded from Outperform to Market Perform at Sanford C. Bernstein. 
  • Marathon Oil (NYSE:MRO): Downgraded from Outperform to Market Perform at Wolfe Research.
  • Noble Energy (NYSE:NBL): Downgraded from Outperform to Market Perform at Wolfe Research.
  • Parsley Energy (NYSE:PE): Downgraded from Overweight to Equal Weight at Morgan Stanley and from Buy to Hold at Citigroup.
  • Southwestern Energy (NYSE:SWN): Downgraded from Market Perform to Underperform at Raymond James Financial and from Market Perform to Underperform from PI Financial.
  • TechnipFMC (NYSE:FTI): Downgraded from Buy to Hold at Societe Generale.

 

UPDATED: EVERY WEEKEND
NOTES:
  • CRB = THOMSON REUTERS/CORECOMMODITY CRB INDEX
  • FTSE ALL WORLD INDEX = MARKET CAP WEIGHTED INDEX OF 47 COUNTRIES
  • TLT = iSHARES 20+ YEAR TREASURY BOND ETF
  • XBB = iSHARES CANADIAN UNIVERSE BOND INDEX ETF
  • SHARE PRICE CHANGES EXCLUDE DIVIDENDS
  • CANADIAN EXCHANGE RATES REPRESENT END-OF-DAY CLOSE
  • SOURCES:
  • COMMODITY PRICES REFLECT NEAR MONTH CONTRACT FROM THE NYMEX/CME GROUP
  • EQUITY PRICES & SECTOR PERFORMANCE PROVIDED BY NYSE & TMX GROUP
  • CHARTPACKS COURTESY STOCKCHARTS.COM
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