Weekly Oil & Gas Notes: Chevron Cuts Back On Risky Exploration, Shell Continues To Trim Downstream Portfolio
Oil and gas stocks strengthened last week as benchmark crude oil prices remained largely flat after falling sharply by more than 47% since hitting a short-term peak in June this year, due to slower demand growth and rising tight oil supply in the U.S. We updated our long-term crude oil price forecast last week. We now believe that the recent decline in oil prices could sustain for a longer period amid slower demand growth and diminishing price-controlling power of the OPEC (Organization of Petroleum Exporting Countries). According to our estimates, annual average crude oil prices (Brent) could bottom out around $80-85 per barrel by 2017 and rise back to $100 per barrel by 2020. (See: Where Are Crude Oil Prices Headed In The Long Run) The price of the front-month Brent crude oil futures contract on the ICE remained largely flat around $61/barrel last week and is currently trading around $62/barrel. The NYSE Arca Oil & Gas Index (^XOI) grew by around 10% last week. Below, we provide an update on some of the key events that occurred last week related to the oil and gas companies we cover.
Chevron Cuts Back On Risky Exploration Projects
Chevron (NYSE:CVX) recently pulled the plug on two of its risky exploration projects amid lower commodity prices. The company decided to withdraw from the $10 billion shale gas project in Ukraine and put its plan for drilling in the Canadian Arctic on indefinite hold. In November of last year, Chevron signed a production sharing agreement with the government of Ukraine for a 50 percent interest in and operatorship of the 1.6 million acre Oleska Shale block in western Ukraine. However, worse than expected findings with similar geology in nearby Poland and Lithuania coupled with lower commodity prices and higher country risk – primarily due to the ongoing conflict with Russia – led Chevron to pull out of the expensive exploration project in Ukraine. [1] In addition, Chevron also notified Canadian officials last week that it is putting its plan to drill for hydrocarbons in the Beaufort Sea on indefinite hold citing economic uncertainty induced by the recent volatility in commodity prices. [2]
- We currently have a $116/share price estimate for Chevron, which is around 5% above its current market price. The company’s share price increased by 10.3% last week.
- We currently estimate Chevron’s 2014 Non-GAAP diluted EPS to be at $10.13, compared to the consensus estimate of $9.90 reported by Reuters.
See Our Complete Analysis For Chevron
Shell Continues To Trim Its Downstream Business
Shell (NYSE:RDSA) continued to trim its downstream portfolio with the sale of its Norwegian marketing assets to Finland’s ST1 last week. As a part of the deal, ST1 will take over Shell’s retail, commercial fuels, and supply and distribution businesses in Norway. In addition, Shell’s aviation business in Norway will become a 50-50 joint venture with ST1. The transaction, which is subject to regulatory approvals and is expected to close next year, falls in line with Shell’s broader strategy of shedding its not-so-profitable refining and marketing assets to boost the profitability of its overall portfolio. Since 2010, the company has generated around $10 billion in proceeds from such transactions. Recent downstream divestments completed by Shell include refinery sales in the U.K., France, Germany, Norway, and Czech Republic. [3]
- We currently have a $71/share price estimate for Shell, which is around 5% above its current market price. The company’s share price increased by 10.2% last week.
- We currently estimate Shell’s 2014 Non-GAAP diluted EPS to be at $7.90, compared to the consensus estimate of $7.55 reported by Reuters.
See Our Complete Analysis For Shell
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Notes:- Chevron Shale Exit Shreds Ukraine’s Hope Of Energy Independence, businessweek.com [↩]
- Chevron Puts On Ice Its Plans To Drill In The Canadian Arctic, vice.com [↩]
- Shell Agrees Sale Of Some Downstream Businesses In Norway To ST1, shell.com [↩]