Permian Oil Operators’ Lofty Production Targets Supported by Strong Hedging, IHS Markit Says
26 July 2017 - 2:10AM
Business Wire
Permian-focused E&Ps have hedged 65 percent of oil
production at more than $50 per barrel
Oil-weighted exploration and production (E&P) companies
operating in the prolific Permian basin have 65 percent of their
oil production hedged at an average strike price of approximately
$50 per barrel. This supports their aggressive production targets
for 2017, according to new analysis from IHS Markit (Nasdaq: INFO),
a world leader in critical information, analytics and
solutions.
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Permian operators: percentages of oil
production hedged, 2Q 2017 through 2018. (Graphic: Business
Wire)
The IHS Markit hedging analysis entitled, “Company Peer Group
Analysis—Oil-weighted U.S. E&Ps: Permian operators’ lofty
production targets supported by strong hedging,” 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.
Overall, the IHS Markit analysis 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 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, IHS Markit said.
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.
“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 Paul O’Donnell, principal
equity analyst at IHS Markit and author of the hedging analysis.
“The median Permian E&P is expected to increase its production
by 25 percent in 2017, as compared to those oil-weighted operators
outside the Permian who have hedged just 19 percent of 2017 oil
production and are anticipating a median decline of 1 percent in
oil/liquids production. 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.”
Companies hedge their production to provide a level of
protection against oil and gas price fluctuations, and during the
period of volatile prices throughout most of 2015 and 2016, North
American E&P companies benefitted significantly from having
large hedge books, O’Donnell said.
“In 2017, hedging is still important for these E&Ps,
especially the more debt-laden companies, which are less likely to
withstand sustained low prices or significant price fluctuations,”
O’Donnell said. “The oil-weighted peer group increased its 2017 oil
hedging from 22 percent to 34 percent since the time of our
previous hedging study, based off of third-quarter 2016 data.”
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.
“At present, it would be a challenge for the Permian E&Ps to
replicate their 2017 hedge positions in 2018, given the weakness in
oil prices and the relatively flat futures curve,” O’Donnell
said.
To speak with Paul O’Donnell, please contact Melissa Manning at
melissa.manning@ihsmarkit.com. For more information on the IHS
Markit “Company Peer Group Analysis—Oil-weighted U.S. E&Ps:
Permian operators’ lofty production targets supported by strong
hedging, please contact sheana.hamill@ihsmarkit.com.
####
About IHS Markit
(www.ihsmarkit.com)
IHS Markit (Nasdaq: INFO) is a world leader in critical
information, analytics and solutions for the major industries and
markets that drive economies worldwide. The company delivers
next-generation information, analytics and solutions to customers
in business, finance and government, improving their operational
efficiency and providing deep insights that lead to well-informed,
confident decisions. IHS Markit has more than 50,000 key business
and government customers, including 85 percent of the Fortune
Global 500 and the world’s leading financial
institutions. Headquartered in London, IHS Markit is committed
to sustainable, profitable growth.
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trademarks of their respective owners © 2017 IHS Markit Ltd. All
rights reserved.
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IHS MarkitMelissa Manning, +1
832-458-3840melissa.manning@ihsmarkit.comorPress Team+1
303-305-8021press@ihs.com
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