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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Is This A Sign That Oil Majors Are Becoming More Bullish

Drilling Rig

French oil company, Total SA announced in a press release Friday that it would be exercising the rights to obtain 75 percent of the lease agreements in the Barnett shale gas and oil fields. The company already possesses the other 25 percent of the field, meaning they would have total production control. This comes at a time when Chesapeake Energy Corporation makes a move to exit the fields. Total will acquire the rights to produce after paying Williams Partners $420 million next quarter.

In 2011, the Barnett field was home to over 80 oil rigs; today that number has fallen to 3. Production can see substantial reductions when oil and gas prices are low. Natural gas production from the Barnett shale peaked in 2012 with 5,743 mb/day and oil in 2013 with 5,641 b/day. Total SA investing and acquiring the 215,000 acres could be signs of returned growth in the quiet field. The land in question could potentially stand to produce 65,000 barrels of oil a day, nearly doubling Total SA’s current U.S. production (89,000 b/d).

Chesapeake is exiting the region to avoid future payments to Williams Partners potentially totaling $1.9 billion. Barnett hasn’t been profitable to Chesapeake for a while, according to analysts. Chesapeake’s breakeven price for natural gas produced in the Barnett shale would have to be $3.82/mmbtu, $1.26 higher than current prices. Total SA is one of the seven largest oil producers in the world and can stand to undertake these investments.

In a meeting this prior Thursday, The European Central Bank surprised speculators by deciding not to raise rates or increase the $1.9 trillion stimulus package. With lingering concerns from Brexit, Europeans have been worried the economic shakeup will require more encouragement from the government. The ECB is now standing firm claiming this won’t be necessary but in the short-term. With this news, the European markets reacted instantaneously resulting in several losses. Total SA was one company that reacted poorly, seeing share price drop $1.39. Related: What Makes Argentina The Sweet Spot In The Lithium Space

Total SA has maintained a presence in the U.S. since 1957 through exploration and production. This is important because European oil companies like Total SA often compete with OPEC nations for oil production. By expanding their company overseas Total has established a second consumer base, more resilient to clashing with the Middle East and the ECB. If Total is successful in producing 65,000 barrels of oil a day on this land it would reinforce their global presence all the more. The U.S. would also receive a massive boost in supply.

Investors should keep a close eye on Total’s activities. With their stock being hindered by the struggling economy and expected to rebound, Total is certainly worth consideration as an investment. Total’s deal is supposed to transpire during the fourth quarter, likely when their shares will rerate based on future earnings prospects around the new company asset base. Total’s gain could put pressure on WTI and Brent oil futures if the deal indicates a greater willingness by shale producers to restart production. Similarly, Chesapeake may see short-term losses if investors become concerned about the company’s future production prospects, but the company should ultimately benefit from being freed from the associated liabilities.

By Michael McDonald of Oilprice.com

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