Permian Basin 2018

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PERMIAN BASIN: MIDSTREAM 58 | October 2018 | "For optics, you're paying a price. It's better to make an economic decision. Now, if they look at it internally and find that 'If deferring production, we lose efficiencies in X, Y and Z' and, if the efficiencies lost are overwhelming, then I would understand. They need to convey that. "But, if it's just to preserve optics, which is consensus production—'We've got to get to X. We don't want to disappoint on that number even if it means we're selling oil for a lot lower prices or tying this company up for longer than we need to into a crappy market'—that makes no sense." Exiting 2017, the Permian rig count was 398, three times the 132 of April 2016, according to Baker Hughes, a GE company. On June 22, it was 473. Capital One Securities Inc. analysts estimated a drop in the count might look like this: The rigs go to the Eagle Ford and other basins with stronger netbacks. Some wells are DUCed. Some oil capacity may be put in trucks and on rail. A worst case is the count drops 25% or some 120 rigs, "however," they added, "that's a bit draconian." Baird analysts wrote after pipeline operator Plains' analyst day, "Plains anticipates shut-in and/ or foregone production growth in the Permian Basin to persist through 2020." As for operators slowing down, Imperial Capital LLC senior analyst Irene Haas reported, "So far, public companies we speak with have no plan to change their development plans for 2018. … Private companies could be more susceptible to pulling back due to a lack of scale and internal expertise in the marketing and hedging arenas." The hedged Devon has Midland swaps on 23,000 bbl/d at -$1.02 to Cushing this year and on 28,000 bbl/d at -$0.46 in 2019. J.P. Morgan analyst Arun Jayaram reported that "Devon does not anticipate slowing down its activity in the Delaware Basin as basis swaps and firm transport protects some 90% of its oil volumes from a margin perspective." Guggenheim's Chandra told Oil and Gas Inves- tor that, within his coverage universe, the leading basis-hedged Permian producers are, in this order, Concho Resources Inc., SM Energy Co., Jagged Peak Energy Inc., Energen Corp., Matador Resources Co., Carrizo Oil & Gas Inc., QEP Resources Inc. and Encana Corp. At average is Centennial Resource Development Inc. "So Centennial is at half the basis hedges of a Concho, SM and Jagged Peak. There is a pretty wide disparity." That's for 2018. "The problem is, by the time you get to 2019, everyone is overwhelmingly under- hedged on basis." Energen's April-December 2018 Mid-Cush hedges on 9.2 MMbbl—about 58% of mid- point-guidance production in that timeframe—are at an average of -$1.37/bbl. Julie Ryland, Energen vice president, investor relations, told Oil and Gas Investor, "Assuming the differential for this time period is actually -$10/bbl, the hedges would rep- resent pre-tax savings on these volumes of approx- imately $80 million." Energen also has -$1.11 Mid-Cush hedges on 6.8 MMbbl in 2019 and, Ryland said, "The company continues to look for opportunities to add to its 2019 hedge position." SM has roughly -$1 basis swaps on about 70% of its Permian production through year-end. Next year, swaps are on about 50% of production at up to -$4.49. It reported in late June that it didn't expect to change its $1.27-billion 2018 capex plan. Jay Ottoson, president and CEO, told sharehold- ers, "For context, if actual market differentials are -$15/bbl through the second half of 2018 and 2019, our expected realized differential on total Midland oil production, net of hedges, would be approx- imately -$5/bbl for the second half of 2018 and -$8.50/bbl in 2019. "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 valuation—in fact, what you lose on time, you more than gain on pricing— it's not a terrible message." —Subash Chandra, Guggenheim Securities LLC

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