US shale oil players weather WTI downturn and derivative losses

Quantum Commodity Intelligence – Investors are continuing to back independent oil and gas players in the Permian basin compared to global majors despite this week's tumble in WTI prices as the market eyes a rise in production from the US largest oil producing region next year, data shows Thursday.

Stocks remain buoyant compared to the likes of Shell, BP and Exxon, partly because the fall in WTI prices has alleviated some of the losses from derivatives taken out last year. 

Oil and gas shares have slid lower this week after the impasse at the OPEC+ meeting fed through into oil futures to send WTI prices crashing from above $77/b on Tuesday to a low of almost $71/b by Thursday.

While stocks have dropped from recent 52-week highs, many of the main independent players in the Permian basin, such as Pioneer Natural Resources, Continental Resources, and Ovintiv, are continuing to trade at a higher value than pre-pandemic levels. 

Low floor hedges taken out last year to ward against a slump in crude has left many independent players in the Permian basin nursing losses from some derivatives rather than enjoying the boom in crude prices over the last few months.

Analysts at JPMorgan said that surging US oil prices in recent months now left almost all the hedges made by the companies it covers underwater, cited in the Financial Times.

Hedging losses 

Pioneer faces hedging losses of almost $900m this year, JPMorgan said.

Rival Permian operators Devon Energy and Diamondback Energy would accrue hedging losses of $657m and $608m respectively at a US oil price of $60, the bank calculated.

Almost a third of the US's 11m barrels a day of production is being sold for just $55 a barrel, according to analysts at IHS Markit. 

The consultancy thinks US oil hedging losses in the first half of 2021 had already hit $7.5bn, but would rise by another $12bn if crude remained at $75 a barrel until the end of the year.

But the derivatives only cover part of production, and many of independents exploration and production companies have a higher share price now than before the Covid pandemic struck, reflecting investment faith in the shift to balance sheet protection and free cash flow. 

Stocks for Pioneer, Continental Ovintiv, Callon and Devon Energy were trading Thursday at a higher value than January 3 2020 before Covid started to make headlines (see table below).  

Last year, during the pandemic, shale oil production quickly dropped by about 2.5 mb/d but much of this was due to wells being shut-in when WTI prices collapsed to $16 in April of 2020, while producers waited for a price recovery.

Since then, about 1 mb/d has returned to production, but supply still remains well below pre-pandemic levels. 

Share price table $