Permian E&Ps hedge 65 percent to support production goals

By Staff | August 01, 2017

To support aggressive production targets for 2017, oil-weighted exploration and production companies in the Permian Basin have 65 percent of their oil production hedged at an average strike price of approximately $50 per barrel, according to an analysis from IHS Markit.

The analysis evaluated the oil and gas hedging in place for a group of 18 oil-weighted U.S. E&Ps in the IHS Markit coverage universe, including a subgroup of 10 Permian Basin-focused operators.

The study noted that the Permian-focused oil-weighted E&P peer group has hedged 65 percent of remaining 2017 oil production at a weighted-average implied price of $50 per barrel, and 50 percent of remaining 2017 gas production is hedged at $3 per Mcf. This compares with just 19 percent of oil production and 29 percent of gas production hedged by the non-Permian E&P oil-weighted peer group in 2017.

“The big takeaway was the differing levels between the two groups and how high the percentage was that the Permian companies have in place,” Paul O’Donnell, principal equity analyst at IHS Markit and author of the hedging analysis. “It was higher than I’ve seen in previous studies.”

O’Donnell has been studying hedging for the past two years during the downturn in global oil prices, which has increased the focus on its importance. Companies hedge their production to provide a level of protection against oil and gas price fluctuations.

“A lot of growth is expected to come from the Permian,” he said. “So we wanted to do a deeper dive and see what support producers there had for the more lofty production goals they have in place.”

The Permian-focused operators have locked in a substantially higher portion of production than their non-Permian counterparts, providing support for the group’s aggressive production-growth targets, according to the IHS Markit report.

“I do think a lot of it is tied to the fact that these companies are selling themselves on the big Permian growth story,” O’Donnell explained. “They took that initiative to lock in a significant percentage of their production, whereas the other companies may have missed that opportunity because of where the futures curve now is. If it’s flattened out and remains below 50, it’s going to be challenging for them to replicate these strong hedges beyond what they already have in place—unless futures prices come back.”

Permian operators with the best downside protection if prices were to drop to $35 per barrel include Concho Resources, Parsley Energy and Laredo Petroleum, who would all have hedged prices above $50 per barrel in 2017 and 2018.

For 2018, the Permian E&Ps have already hedged 25 percent of oil production at $51 per barrel and 9 percent of gas at $3 per Mcf, while the non-Permian E&Ps are largely unhedged for oil, but also have 9 percent of their gas production hedged.