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The oil market was relatively calm this week, though it did spend the latter part bracing for the impact of Hurricane Harvey, which is bearing down on the Gulf Coast. In fact, the industry has already proactively shut down about a quarter of the oil and gas output from the Gulf of Mexico, as well as several refineries. The biggest concern is that flooding might cause prolonged outages, which could impact oil demand and weigh on prices.
That said, while all eyes are on Harvey, there were a few notable news items that moved oil stocks this week. Those big movers, according to data from S&P Global Market Intelligence, were Seadrill Partners (NYSE: SDLP), Archrock (NYSE: AROC), and Sanchez Energy (NYSE: SN).
Archrock led the charge this week, rising 14.4%. Fueling that performance was a bullish research note from an analyst at RBC Capital who upgraded the stock from "market perform" to "outperform" based on valuation. That's after performing a sum-of-the-parts analysis on the natural gas compression services company that yielded a value of $13 per share. That price is worth noting because even after this week's big move higher, the company only trades at around $10 per share, which implies it still has plenty of upside if the market buys into RBC Capital's valuation.
Seadrill Partners also moved higher this week, rallying 14%. One of the catalysts was the continued follow-through from last week's news that the offshore driller had amended some of its credit facilities, which removed the risk that the company might get pulled into its parent company's looming bankruptcy. Meanwhile, the other driver was that the company reported solid second-quarter earnings this week. Overall, Seadrill Partners recorded $16.6 million in net income and $32.7 million of distributable cash flow. Furthermore, the company noted that its order backlog stood at $1.9 billion, with an average contract duration of 1.5 years. Given that revenue visibility and the recent credit facility agreement, Seadrill Partners now has enough confidence in its outlook that it reinstated its quarterly distribution to investors.
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Sanchez Energy, on the other hand, plunged this week, falling 12.8%. Driving Sanchez Energy's sell-off was the Eagle Ford Shale driller's decision to pay the recently declared dividends on two series of its preferred shares with common stock instead of cash. This move not only dilutes existing investors but also increases worries about the company's financial situation. While Sanchez recently announced a move to boost its liquidity by selling its Javelina asset in the Eagle Ford for $105 million in cash, investors remain concerned that the company might need to sell more assets or cut deeper into its drilling budget to stay afloat if oil prices don't start improving.
Of those three moves, the one that stands out the most is Sanchez Energy because it appears that the market has completely lost confidence in the company. After soaring to start the year on the heels of a major acquisition, the company has fallen sharply in recent months and is now down 70% from its high. It could have further to fall given its tight financial situation, especially if oil prices take another tumble.
That's something to keep an eye on next week given the potential damage Hurricane Harvey could inflict on the Gulf Coast. Not only is there a concern that the storm could damage the country's refining capacity, but flooding in Texas could force Eagle Ford shale producers like Sanchez Energy to shut in wells. Given the impact potential of this storm, energy stocks could be volatile next week.
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