Shale producers are dropping rigs and adding hedges, ESAI Energy says

BOSTON -- Despite a slowdown in the number of rigs being added in the shale basins, output targets will be met or exceeded as producers are adding to their hedged positions, according to ESAI Energy’s recently released North America Watch. Total 2017 shale output will average 5.2 MMbpd, 580,000 bpd higher than last year. Producers will seek to increase their hedges for 2018, but will need to cover their full-cycle costs for sustainable growth. Even with a slowdown in rig count, shale production, led by the Permian basin, will rise roughly 450,000 bpd to average 5.6 MMbpd in 2018. Hedging will increase and support further growth if the forward curve for WTI moves over $50.

ESAI Energy’s review of 35 E&P firms prominent in the U.S. shale basins indicates that over 65% of their combined expected output is hedged for the rest of 2017. Although most of these same producers have some volume hedged in 2018, so far the amount is relatively small, about one third of their combined output. Current futures prices for WTI remain close to $49/bbl for 2018. ESAI Energy reports that shale producers need prices north of $50 to cover operating and development costs.

Most of the E&Ps with hedged output have a presence in the Permian. The Permian basin continues to be the main source of growth in shale output as major producers increase their acreage, independent E&Ps add hedges to lock in value, and the growing number of DUCs in the region provide a cushion of ready supply. ESAI Energy analyst Elisabeth Murphy points out that “the Permian rig count has grown so quickly that it could stay at its current level, or even fall back some, and output would still grow. Bringing Permian DUCs online could also bring additional growth next year without increasing rigs."