This Week in Energy: Chevron, Seadrill, Continental and More

Crude futures were volatile this week. After rallying above the key $50 per barrel mark and igniting some short covering, Wednesday’s EIA report failed to confirm Tuesday’s API data. Not only did distillate inventories rise, but U.S. production also rose by 10,000 barrels per day, with production in Alaska rising by 18,000 barrels per day and production in the lower 48 declining by 8,000 barrels per day. The plus-10,000-barrel-per-day number was a sharp deviation from the negative prints in previous weeks.

With that said, let’s take a look at some of the stocks that were in the spotlight this week, including Baker Hughes Incorporated (NYSE:BHI), Continental Resources, Inc. (NYSE:CLR), Chevron Corporation (NYSE:CVX), Seadrill Ltd (NYSE:SDRL), and Transocean LTD (NYSE:RIG). We’ll also examine hedge fund sentiment towards these stocks.

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Hurting investor sentiment this week were some comments from Continental Resources, Inc. (NYSE:CLR) CEO Harold Hamm, who said that his company has begun completing some of its DUC (drilled but uncompleted) wells. Given Continental Resources is beginning the process, it is a safe bet that other shale drillers are thinking the same thing. If production from DUC wells outperform, WTI’s discount to Brent could widen and the crude bull market could experience some turbulence.

Adding to the thinking that the supply decline might not be as bullish as before was Friday’s data from Baker Hughes Incorporated (NYSE:BHI). According to the service provider, the U.S. rig count increased for the second week in a row, rising by three to 328, after oil rigs rose by nine the previous week. Throw in the strengthening dollar and fears of a Brexit, and it is abundantly clear why crude prices fell below $50 per barrel on Friday.

Nevertheless, there are still reasons to be medium-to-long-term bullish. Some analysts think the number of oil rigs needs to rise substantially higher for U.S. production to grow. A small rise of three-to-nine rigs simply doesn’t make a big enough difference to end the trend. According to some analysts, the actual oil rig count may need to increase by 50-to-70 from current numbers for domestic production to grow again. There are also supply disruptions internationally. The Niger Delta Avengers blew up another Chevron Corporation (NYSE:CVX) well in Nigeria on Wednesday and rejected the Nigerian government’s offer of talks to end the militant group’s attacks. According to its Twitter account, the Avengers said, “We’re not negotiating with any committee. If the Fed Govt is discussing with any group they’re doing that on their own”. The longer the militant activity goes on in Nigeria, the more inventories draw down.

Based on our database of 766 elite funds, Continental Resources, Inc. (NYSE:CLR) was the most popular with the smart money crowd, with 50 funds holding shares of the company at the end of March. Chevron Corporation (NYSE:CVX) was next with 46 funds owning its shares, while Baker Hughes Incorporated (NYSE:BHI) wasn’t too far behind with 43 funds long its stock at the end of the first quarter.

On the next page we’ll examine the week’s events concerning Seadrill and Transocean.

The offshore drillers caught a bid earlier in the week when crude prices rose past $50 per barrel. Transocean LTD (NYSE:RIG) surged to over $11.50 per share and Seadrill Ltd (NYSE:SDRL) rallied to almost $4.00 per share. Some traders were buying due to momentum while others were using the offshore drillers as a proxy for out-of-the-money call options. Although offshore drillers aren’t competitive at $50 per barrel, they are much more competitive at $60-$80 per barrel. Although $60-$80 per barrel seems unlikely right now, stranger things have happened in the energy sector, such as the current 80%+ rally.

The bullish price action in the offshore sector diminished later in the week, however, after Seadrill Ltd (NYSE:SDRL) announced another debt-for-equity swap. The driller will create 7.5 million more shares in exchange for reducing its principal debt by $50 million. Given the company’s debt load, Seadrill will need crude prices to rally substantially higher for the dilution to not hurt as much for future potential swaps. Shares of both companies also fell after WTI prices fell below $50 on Friday.

22 top funds in our database owned Seadrill on March 31, while 39 were long Transocean LTD (NYSE:RIG).

Weekly Stock Performance

Disclosure: None