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Hedging will support US 2017 output: Deloitte

20 Apr 2017, 7.34 pm GMT

Hedging will support US 2017 output: Deloitte

Houston, 20 April (Argus) — US oil and gas producers expanded their hedging at the end of last year and early this year which will allow them to sustain output even if prices weaken, consultancy Deloitte said.

Most of the hedges taken by producers have been above $50/bl, ensuring steady cash flow to push ahead with investment plans for this year and possibly next year. But pushing through higher output even in a low oil price environment risks prolonging the oil market downturn as supply and demand remain imbalanced, said John England, vice chairman of the US energy practice at Deloitte, at the Mergermarket Energy Forum conference today.

"Hedging incentivizes you to just keep going in and producing, it takes out the boom and bust cycles a little bit," he said.

England did not give a figure for how much of the total expected 2017 US shale oil output has been hedged, but some producers appear to be growing their positions. Pioneer Natural Resources is maintaining derivatives positions that cover about 85pc of its forecast 2017 oil output, which is the same as last year. Pioneer is looking to take on more hedges for 2018.

Top Bakken producer Whiting Petroleum, which steadily increased its 2017 hedges last year, plans to add more hedges later this year and early next year, targeting 50-60pc coverage for 2017-18. Chesapeake Energy has 71pc of its projected 2017 output covered at $3.07/mmcf and 68pc of its oil output at $50.19/bl.

While hedging will ensure steady cash flow, a key unknown is the increase in costs that may come toward the second half of the year as producers continue to ramp up drilling, England said. Producers may also face a shortage of equipment and manpower to sharply ramp up activity as tens of thousands of workers were laid off, especially by the services companies, and many rigs and other equipment were idled.

Producers saw costs decline by as much as 40pc in 2016 compared to 2015, driven by the discounts offered by oilfield service providers, but also reflective of advancements in technology and techniques. Some of those costs may start to come back up as activity picks up.

"There have been tremendous cost reductions in the industry," England said, but they are currently "generally not at sustainable levels."

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