Permian Shale Producers Take the Strain
In a fight, it's the one who can endure the most who prevails. 1
As I wrote last week, hedging is one way U.S. oil producers endure the pressures of low prices. And a recent survey by Bloomberg Intelligence found many large E&P firms are locking in pretty low prices for their expected output this year.
In particular, producers in the Permian shale basin tend to be hedging at lower prices than rivals centered on less-attractive basins such as the Bakken and Eagle Ford basins. The chart below shows the proportion of 2017 output hedged by these companies at the average price locked in. I've color-coded them according to their main basin exposure, and the bubbles represent the absolute amount of oil covered by hedges:
Permian-weighted companies such as Pioneer Natural Resources Inc., Energen Corp. and RSP Permian Inc. tend to dominate that upper-left part of the chart, meaning they have hedged more of their expected production at lower average prices. This is a result of aggressive drilling programs (with hedging providing comfort for the lenders and investors funding it).
But the willingness of Permian-weighted firms to take lower prices in general should be noted by anyone who is long of oil.
Companies more focused on the Eagle Ford basin are clearly less hedged and generally at higher prices, likely reflecting the tougher economics there. EP Energy Corp. is an outlier in that respect, but this reflects aggressive hedging taken early in 2016, when oil prices rallied, and the company's need to deal with its high leverage, with net debt at 6.1 times Ebitda at the end of 2016, according to data compiled by Bloomberg.
The Bakken crowd are also hedged at generally higher prices than those in the Permian basin, but the weighted average is still less than $50 for the five in the chart 2 . Granted, some big Bakken producers, such as Hess Corp. and Continental Resources Inc., haven't hedged any production, according to Bloomberg Intelligence.
Yet, with the North Dakota Industrial Commission reporting the state's oil production nudged back above 1 million barrels a day in February, anyone keeping track of U.S. supply trends shouldn't keep their lens focused solely on West Texas.
I'm paraphrasing a famous quotation from Terence MacSwiney, an Irish politician who died on hunger strike in 1920. The full quotation is: "It is not those who can inflict the most, but those that can suffer the most who will conquer."
These are: Northern Oil and Gas Inc., Oasis Petroleum Inc., QEP Resources Inc., Whiting Petroleum Corp. and WPX Energy Inc.
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