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Weekly Energy News Roundup: Rising Rigs and Rice

The oil markets have yet to stabilize. The price of crude oil is on pace for the worst first half of a year in 20 years. A bullish crude oil inventory report wasn’t enough to reverse the oil price decline, as investors continue to fear that new oil production from the U.S. is going to offset OPEC’s production cuts.

Crude Inventories Drop

The Energy Information Administration (EIA) reported this week that commercial crude oil inventories fell by 2.5 million barrels, and total stocks of petroleum and petroleum products fell by 2.7 million barrels. Commercial crude oil stocks now stand at 511.5 million barrels, versus 500 million barrels a year ago and an all-time high of 535 million barrels in March of this year. However, crude oil stocks remain above the 5-year range for this time of year:

The EIA also reported this week that U.S. refineries are running at record rates. This is helping boost finished product exports like gasoline. However, neither this news nor the news that inventories dropped this week was enough to halt the oil price decline. 

The sell-off has been so broad that even the refiners are dropping, and they are one group that tends to fare better when oil prices are falling. Add in the fact that refiners are running at record rates, and the performance of the refiners in this market has been the most obvious disconnect in the market (followed closely by the sell-off in companies that primarily produce natural gas).

Rigs Increase 22nd Straight Week

Baker Hughes (NYSE: BHI) reported this week that the U.S. rig count rose by six to reach the highest level in more than two years. This increase also extended the record number of consecutive increases to 22:

Note that although there is a long way to go to reach the previous highs, the rig count is increasing at about the same rate it did following the oil price crash of 2008-2009. This is what oil traders fear — that U.S. oil production is going to bounce back so strongly that it will render OPEC’s production cuts ineffective at reducing crude oil inventories.

EQT Buys Rice

Rice Energy (NYSE: RICE) shares jumped by 28% on news that it would be acquired by EQT Corporation (NYSE: EQT). The transaction brings together two of the top Marcellus and Utica producers and would create the largest natural gas driller in the country, responsible for 5% of the gas supply in the U.S. 

Under the agreement, EQT will acquire all of the outstanding shares of Rice common stock for approximately $6.7 billion – consisting of 0.37 shares of EQT common stock and $5.30 in cash per share of Rice common stock. EQT will also assume or refinance approximately $1.5 billion of net debt and preferred equity. 

EQT will also obtain Rice’s midstream assets, including a 92% interest in Rice Midstream GP Holdings LP, which owns 100% of the general partner incentive distribution rights and 28% of the limited partner interests in Rice Midstream Partners LP (NYSE: RMP), and the retained midstream assets currently held at Rice. The retained midstream assets, which EQT announced it would sell to EQT Midstream Partners LP (NYSE: EQM) in the future through drop-down transactions, are expected to generate ~$130 million of EBITDA in 2018.

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Obscure Tax Law Forces This Company to Pay Out 90% of its Profits

A 50-year-old loophole is forcing one company to pay out $9 of every $10 it makes from ironclad contracts with the U.S. Government.

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