Weekly Oil & Gas Notes: Exxon, BP and Petrobras

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Oil and gas stocks continued to decline last week, as benchmark crude oil prices continued to remain weak on concerns that the growth in global oil demand is insufficient to absorb rising supplies. Earlier this month, the International Energy Agency (IEA), in its latest monthly report, cut its forecast for the growth in global oil demand this year. It now expects global oil demand, which stood at around 90.5 million barrels per day last year, to increase by just around 0.9 million barrels per day this year. The price of front-month Brent crude oil futures contract on the ICE has declined by more than 15% since June this year and is currently trading around $97/barrel. The NYSE Arca Oil & Gas Index (^XOI) declined by more than 3% last week. [1]

Below, we provide an update on some of the key events that occurred last week related to the oil and gas companies we cover.

U.S. Sanctions Impact Exxon’s Arctic Exploration

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Earlier this month, the U.S. government extended sanctions on Russia over the Ukrainian crisis. The previous round of sanctions only restricted the export of U.S. technology for Arctic and shale exploration, which did not prevent Exxon and Rosneft from starting to drill an exploratory well in the Arctic Kara Sea. However, the new measures that are specifically targeted towards crippling the cooperation between Western and Russian energy companies in the Arctic and tight oil exploration require the removal of U.S. workers on these projects by September 26th. [2]

As a result, Exxon Mobil (NYSE:XOM) is winding down its drilling operations in the Kara Sea (a part of the Arctic Ocean north of Siberia) in order to comply with the latest U.S. sanctions on Russia. The company announced that it has received a license from the U.S. Treasury Department allowing a slippage beyond the sanctions’ deadline to enable a safe and responsible wind down of exploration activities. We believe that although the near-term financial impact of this particular event on Exxon would be limited, prolonged restrictions on drilling activities in the Arctic Ocean could significantly impact the company’s long-term growth potential. [3]

  • We currently have a $107/share price estimate for Exxon Mobil, which is around 15% above its current market price. The company’s share price decreased by around 3% last week.
  • We currently estimate Exxon’s 2014 GAAP diluted EPS to be at $7.96, compared to the consensus estimate of $7.69 reported by Reuters.

See Our Complete Analysis For Exxon Mobil


BP Begins Work On The Southern Gas Corridor

At a time when EU is increasingly imposing sanctions on Russia over the Ukrainian crisis, BP Plc. (NYSE:BP) recently broke ground on the Southern Gas Corridor project in Azerbaijan. This is an important milestone for the company’s Shah Deniz Phase II project that expects to deliver 16 billion cubic meters of natural gas per annum (BCMA) to Georgia, Turkey, Bulgaria, Greece, Italy and Albania through a 3,500 kilometers long pipeline. [4]

The second phase of development of the Shah Deniz gas field, which is located around 70 kilometers offshore in the Azerbaijan sector of the Caspian Sea, is being coupled with huge investments in establishing the pipeline infrastructure to transport 10 BCMA natural gas to the European markets. These markets are heavily dependent on Russia for their natural gas supply, which gives a lot of political leverage to Russia in the region. Importing gas from the Caspian region is one of the prime alternatives for the European countries to diversify their natural gas supplies away from Russia.

The transportation of natural gas from the Shah Deniz field in the Caspian Sea to Europe would require enhancement of some of the existing infrastructure and development of a chain of new pipelines. The southern gas corridor is a non-Russian and non-Iranian natural gas pipeline system to transport natural gas from the Caspian region and Central Asia to Europe.

  • We currently have a $54/share price estimate for BP, which is around 20% above its current market price. The company’s share price decreased by around 6% last week.
  • We currently estimate BP’s 2014 diluted EPS to be at $4.69, compared to the consensus estimate of $4.71 reported by Reuters.

See Our Complete Analysis For BP

Petrobras Strikes Gas In Sergipe-Alagoas Basin

Petrobras’ (NYSE:PBR) exploration program in Brazil has been a huge success for the past few years. The company’s exploration success ratio in the domestic market has increased from just 59% in 2011 to 75% in 2013. Recently, Petrobras announced that it found natural gas while drilling an extension well in the Discovery Evaluation Plan area of Poco Verde, which is located in the BM-SEAL-4 block in Sergipe-Alagoas Basin ultra-deep waters off the coast of the Brazil’s northeastern state of Sergipe. The company operates the BM-SEAL-4 concession with a 75% stake in partnership with India-based Oil and Natural Gas Corporation (ONGC) that holds the remaining 25% stake. [5]

Petrobras reported that the well confirmed the existence of reservoirs with good permeability and porosity conditions that are key to the economics of hydrocarbon extraction. The new discovery is expected to boost Petrobras’ net proved hydrocarbon reserves, which stood at 16.6 billion barrels of oil equivalent at the end of last year. To give some perspective on these numbers, Petrobras held enough hydrocarbon reserves at the end of 2013 to produce oil and gas for the next 20 years at last year’s production rates.

  • We currently have a $21/share price estimate for Petrobras, which is around 20% above its current market price. The company’s share price decreased by around 9% last week.
  • We currently estimate Petrobras’ 2014 diluted EPS to be at $2.1, compared to the consensus estimate of $1.67 reported by Reuters.

See Our Complete Analysis For Petroleo Brasileiro Petrobras

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Notes:
  1. Oil Prices Slip On Unexpected Supply Rise, wsj.com []
  2. Exxon Winds Down Russian Drilling, wsj.com []
  3. Exxon Mobil Statement On Treasury Department Sanctions On Russia, exxonmobil.com []
  4. Azerbaijan Celebrates The 20th Anniversary Of ACG and Groundbreaking For The Southern Gas Corridor, bp.com []
  5. New Well Confirms Sergipe-Alagoas Basin Potential, investidorpetrobras.com []