Permian hedges 65% of output
Wednesday, Aug 02, 2017
Large oil companies operating in the Permian Basin in Texas have hedged 65% of their output for the remainder of 2017 at an average strike price of US$50 per barrel according to consultancy IHS Markit.

The consultancy found that half of the remaining 2017 gas production was hedged at US$3 per thousand cubic feet. These compares with just 19% of oil production and 29% of gas production hedged by the sector’s oil-weighted peer group outside the Permian in 2017, IHS Markit said.

This is because the exploration and production (E&P) companies operating in the Permian, which is currently dominated by prolific unconventional production, have aggressive oil production targets for 2017, said IHS. They have the benefit of operating in the oil-soaked Permian, which has multiple layers of prospective shale.

For 2018, the Permian E&Ps have already hedged 25% of oil production at US$51 per barrel and 9% of gas at US$3 per thousand cubic feet, which is high for this time of the year, while the non-Permian E&Ps are largely unhedged for oil, they do have 9% of their gas production hedged for next year.

Oil prices have been hovering below US$50, and it is unclear if they will recover more because of the US and global supply glut. Companies’ larger hedge books in the Permian reflect optimism for the play, the predominant play currently for oil production in the US.

In July, the Permian, which contains vast reserves, had an estimated 2.5 million barrels of oil production daily out of a total of 5.5 million in the country’s seven largest shale plays, and 8.493 bcf (240.4 mcm) per day of gas production out of a total of 52.021 bcf (1.47 bcm) per day in the country’s largest shale plays, according to federal government data.

“The different levels of hedging between the two oil-weighted subgroups of Permian versus non-Permian E&P operators is reflected in the wide disparity of their production growth targets, and the difference is striking,” said principal equity analyst at IHS Markit and author of the hedging analysis Paul O’Donnell.

“The median Permian E&P is expected to increase its production by 25% in 2017, as compared [with] those oil-weighted operators outside the Permian who have hedged just 19% of 2017 oil production and are anticipating a median decline of 1% in oil/liquids production,” he continued.

“Consequently, we expect the Permian E&Ps will be less likely to downwardly revise 2017 spending plans and production targets in the upcoming second-quarter 2017 earnings announcements, compared with their non-Permian counterparts,” he concluded. “The oil-weighted peer group increased its 2017 oil hedging from 22% to 34% since the time of our previous hedging study, based off of third-quarter 2016 data.”

Hedging especially benefits debt-ridden companies. According to the consultancy, Permian operators with the best downside protection if prices were to drop to US$35 per barrel include Concho Resources, Parsley Energy and Laredo Petroleum, which all have hedged prices above US$50 per barrel in both 2017 and 2018.

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