Permian Basin 2018

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PERMIAN BASIN: MIDSTREAM 56 | October 2018 | There is also rail, but Ethan Bellamy, senior research analyst for R.W. Baird & Co. Inc., said, after Plains All American Pipeline LP's analyst day in early June, that truck and rail options are limited. "Plains estimates 150,000 bbl/d of total truck and rail capacity, which won't add materially to Midland and Delaware takeaway capacity." TPH analysts took a look at the truck option in early May. Training to receive the proper license is up to 10 weeks, so labor availability is possible—"at a cost." But mandatory trucker electronic logging went into effect in December and enforcement began in April. "Lastly," TPH reported, "the average [truck] tanker holds some 9,000 gallons—or some 215 bar- rels. That means 100,000 bbl/d by road takes 1,000- plus trucks—factoring in travel time to and from the Gulf Coast along with driver-resting rules." Defer? Guggenheim's Chandra said that adding basis hedges for the balance of this year and into 2019 isn't really possible now for producers. "I think the market con- ditions have gotten away from them. In other words, if they attempted to basis hedge now, it would be pretty expensive. I think the opportunity is gone." Instead, exposed Permian producers' other opportunity is "slowing your program down. Just tell people that, 'We can defer this program and we can restart this program without a whole lot of friction or time lapse. If we do that, we spare our- selves one year of trauma and volatility. We come out on the other side and we can recapture and sell our oil for a lot more without locking ourselves into anything.'" He added, "Which could be what Halcón [Resources Corp.] is trying to message today." Delaware Basin pure-play Halcón announced in mid-June that it was dropping one of its four rigs. It expects to have firm transport of 25,000 bbl/d to the Gulf Coast by the second half of 2019. In April, it sold in-the-money basis hedges for some $30 million. That and some ongoing Mid-Cush hedges mean its discount to WTI is $3.90/bbl on 8,000 bbl/d in this half and a $0.03/bbl premium on 12,000 bbl/d in the first half of 2019. TPH analysts called the Halcón ("hawk" en espanol) news "El Canario in the Coal Mine," add- ing, "… This falls in line with our thinking from last week that privates and smaller operators in the basin are most likely to feel the pressure from a pricing standpoint." In client calls in early June, the analysts found both long-only and hedge fund clients "are now generally convinced that [Permian] activity cuts are a matter of 'when,' not 'if.'" They're staying on the sidelines, meanwhile." The team expected more news like Halcón's "as we believe Midland differentials have the potential to get worse before they get better in the fourth quarter of 2019 and first quarter of 2020, when Midland-Gulf Coast lines come online." J.P. Morgan's oil and gas analysts estimated that operators without firm transportation (FT) "may have to at least consider the idea of deferring com- pletions if the basis in fact blows out past a $15 to $20/bbl differential for a considerable period of time or if physical constraints become reality." Chandra said, "The initial concern is folks don't want to lower their production numbers for '18 or '19. But, if they can just explain that one year of deferral doesn't cost you much in terms of valua- tion—in fact, what you lose on time, you more than gain on pricing—it's not a terrible message. I think if you put in the right slides and show the math, folks will get it." Less is more? "Yeah, at least for a short period of time. If you truly believe this is a short-term issue and the pipes are coming, which they are, the question becomes how much of a delay there could be in those pipes coming on. But the pipes are coming on. "If you believe it is going to get worse before it gets better, but the whole span of this event is a year, then defer. And, if what you get on the other side of that is $4 or $5 per barrel or better, I think the market would be like 'Cool' versus saying, 'Hey, we're going to basis-hedge our way through this and lock ourselves into these hedges—and these hedges are increasingly expensive, so we're locking ourselves into worse pricing. But we're doing it because we just don't want to show less volume.'

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