Taal selectie


Shale is the name of the game

After a wild ride in the USD 65-70 range, oil ended August at USD 69.8 per barrel (WTI), up 1.5% for the month. US shale oil producer shares shed 1.6% on average (XOP index), while our selection was down 3%. About half of our holdings are “large” caps. Most have full or near full exposure to the Permian Basin – and fell 7.9% on average in August. Our remaining “large” cap holdings, those only partially exposed to the Permian Basin, lost a lesser 2.5%. The other half of our selection, consisting of small caps, posted a flat average performance in August, with also significant differences between companies active in the Permian Basin and those that are not.

crudSource : Bloomberg

As mentioned in prior updates, pipeline capacity problems are responsible for lower than forecasted output growth in the Permian Basin and hence lower oil revenues for the producers located there. They are forced to find alternative (and much more expensive) ways to transport their oil to the Gulf of Mexico, for an additional cost of up to USD 15 per barrel on part of their production.

For producers that have secured sufficient pipeline capacity or sold forward their oil at a fixed price, there is no issue. For the others, however, the problem is real. A couple of months ago, as the first signs of this pipeline capacity shortage were appearing, we adapted our selection accordingly.

Unfortunately, the August selloff was indiscriminate, with “good” and “bad” Permian producers punished alike by financial markets. As such, the pure Permian producers in our selection all fell between 7.3% and 8.3% (for an average decline of 7.9% as mentioned above) despite different exposures to the pipeline issue and different hedging positions.

In any event, the problem is temporary and stands to be resolved within the next six to nine months, as new pipeline capacity becomes available. The current dip in shale producer stock prices should therefore be viewed an opportunity rather than a risk, particularly if the oil price continues to trend up over the next years, as we expect.




(update : 09.2018)

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