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Is Low Oil a Slippery Affair for US Shale Producers?

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Although there is a positive correlation between the fate of explorers and producers with oil price, the commodity’s current price is not low enough to halt shale players’ fracking operations.

With the advancement of technologies, well costs have declined drastically. Also, upstream energy players, with operations in key domestic shale plays, have reportedly hedged part of their 2018 and 2019 liquid volumes. These developments will likely insulate some of the key shale players from bearish crude landscape.

Oil Slips Below $50

West Texas Intermediate (WTI) crude futures recently fell to $49.41 a barrel, marking the lowest since Oct 9, 2017. This reflects rising supply by major producers and a soft demand outlook on fears of economic slowdown.

Through the week ended Nov 23, stockpiles of U.S. crude rose 3.6 million barrels to settle at 450.5 million barrels, per the U.S. Energy Information Administration. In fact, the inventory level not only rose for 10 straight weeks but is also above the five-year average mark by 7%. Temporary U.S. allowance to some nations to purchase Iranian crude despite Washington’s restored sanctions against the Islamic Republic is also driving global crude supply.

President Vladimir Putin reportedly made a comment that Brent crude, which is around $60 per barrel, is not hurting Russia’s economy and will not result in a deficit in government budget. The announcement days before OPEC’s Vienna meeting is making oil traders more bearish.     

US Shale Players to Defy Bearish Crude

Low Break-Even Oil Price

Most of the shale plays in the domestic market have the break-even oil price at significantly below $50, per a presentation by Pioneer Natural Resources Company (PXD). The break-even crude price for several domestic resources — like Permian, Eagle Ford and Bakken — is even below $30. A published article claimed that producers in all the three resources are benefitting from declining total well costs, which include expenses associated with drilling, pumping, fluid employed for activities related to hydraulic fracturing and proppant. 

Liquid Output Hedged

Energy research and consulting group Wood Mackenzie claimed that many upstream players, employing hydraulic fracturingtechnique, have hedged oil production to endure the volatility in commodity prices. Wood Mackenzie added that the companies have set their hedging in such a way that they will benefit when crude drops below $56 per barrel. Hence, the derivative contracts are insulating the companies as oil hovers around $50. Wood Mackenzie’s analysis revealed that derivatives contracts on average protected 45% of the U.S. drillers’ — only those firms employing derivative contracts — 2018 liquid production and 25% of next year’s output.   

Stocks to Keep An Eye On

Companies employing the hedging program or with operations in Permian, Eagle Ford or Bakken are well placed to defy the weak crude pricing scenario. We would want investors to keep a track of the following upstream players or continue to hold them if they are already in their portfolio. Each of the stocks carries a Zacks Rank #3 (Hold).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Per data provided by Wood Mackenzie, Concho Resources Inc. (CXO - Free Report) , among the leading oil producers in the prolific Permian Basin, has hedged more than 80% of its 2018 liquid production and over 60% of 2019 output.

Encana Corporation (ECA - Free Report) — with strong presence in oil-rich Permian and Eagle Ford core resources — has also hedged significantly more than 60% of its 2018 liquid volumes and slightly more than 40% of 2019 liquid output, the energy consulting firm added.

Denbury Resources Inc. (DNR - Free Report) is another upstream energy player that employed oil price derivative contracts to hedge considerably more than 60% of 2018 liquid production and close to 60% of 2019 output, added Wood Mackenzie.

Whiting Petroleum Corporation (WLL - Free Report) , with presence in the Bakken play, has covered more than 60% of 2018 liquid production under hedging program, according to the energy consulting group.

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