What happened
Oil meandered along this week, briefly spiking a couple of times on bullish news only to fall back on renewed market skepticism. Overall, crude ended the week about 1% lower to around $46 per barrel as energy traders await an upcoming meeting of major oil producing nations.
That said, while the oil market didn't do much this week it doesn't mean that oil stocks were quiet. According to data from S&P Market Intelligence, several oil stocks notched double-digit gains this week. Leading the way were Zion Oil & Gas (ZN 0.34%), Select Energy Services (WTTR +1.16%), Laredo Petroleum (LPI +0.00%).
Image source: Getty Images.
So what
Zion Oil & Gas led the way, zooming nearly 37% on the week. Fueling those gains was an operational update from the Israel-focused exploration company, which has now reached a one-mile depth on its Megiddo-Jezreel #1 exploration well and hasn't run into any issues. That puts Zion Oil & Gas about a third of the way to its target depth of 15,000 feet. This well is crucial to the company's future since it currently doesn't produce a drop of oil and is just starting its exploration program in the country. Because of that, investors buying this stock are making a big gamble, especially given its run up this year.
Select Energy Services also notched a big gain this week, surging 21% after agreeing to merge with privately held Rockwater Energy Solutions in a stock-for-stock deal. That transaction further strengthens the leading water solutions company's offerings across all major shale plays and adds highly complementary assets. Meanwhile, by paying for Rockwater in stock, the combined company will maintain a strong unleveraged balance sheet, which gives it the flexibility to continue developing infrastructure projects and pursue additional acquisitions.
Finally, Laredo Petroleum popped more than 12% this week after confirming that it has started the process to sell its interest in the Medallion Pipeline. The Permian Basin-focused driller currently owns 49% of Medallion Gathering & Processing, which is the sole owner of the Medallion-Midland Basin Pipeline system. Analysts have long thought that this sale made sense, especially considering the valuation that buyers are paying for midstream assets in the Permian these days. For example, NuStar Energy L.P. (NS +0.00%) paid a whopping 20 times expected 2017 EBITDA (earnings before interest, taxes, depreciation, and amortization) for Navigator Energy Services earlier this year, nearly twice what midstream assets typically fetch.
According to analysts at Tudor Pickering, the NuStar Energy deal makes the Medallion Pipeline look more valuable, which they thought should cause Laredo to sell down its stake and unlock that value for investors. Given this week's announcement, it would appear that Laredo agrees that it makes sense to try and unlock that value while prices remain rich.
Now what
Of this trio of movers, only Select Energy Services had thesis-altering news this week given that its transaction to acquire Rockwater increases its scale without negatively impacting its balance sheet. Because of that, it's worth a closer look. Contrast that with Zion and Laredo, which rallied on the hope of good news ahead. If it fails to materialize, both stocks could quickly give back this week's gains.
