Coming U.S. shale results will test extent of oil hedges, output cuts

By Arathy S Nair and Arunima Kumar

(Reuters) – As low crude oil prices leave U.S. producers struggling to eke out profits, investors will focus on production hedges and cost-cuts to determine winners from losers as first quarter earnings roll out in coming days.

Global energy demand have tumbled by nearly a third due to coronavirus lockdowns, fueling an oil glut that halved U.S. crude prices in March.

The collapse of an OPEC pact to curb production then had some producers fighting to survive and shale investors prizing access to cash above other measures, said energy analysts.

First quarter earnings will be heavy with writedowns, warnings of limited access to capital and sales below cost. Those firms that have hedged, or sold production at prices above current levels, and have slashed outlays, will be best positioned to withstand the price squeeze.

“Liquidity forecasts will be the most important data point,” said Dan Pickering, chief investment officer at Pickering Energy Partners. That outlook “will wrap together a company’s hedge position, expected production outlook, cost cutting, capital spending,” Pickering said.

CONOCO DELIVERS CUTS

ConocoPhillips , which is cutting output by 225,000 barrels per day, kicks off the parade on Thursday with analysts forecasting a 24-cent-a-share profit, down from $1 last year.

On May 5, Diamondback Energy Inc is expected to report per share profit of $1.36, from $1.39 a year ago, and a day later Pioneer Natural Resources Co may show $1.29, from $1.83 last year, according to IBES data for Refinitiv.

Continental Resources Inc , one of the largest U.S. shale producers that does not hedge production, has notified some customers it would not supply oil at below cost. It is expected on May 11 to report per share earnings of 4 cents, down from 58 cents a year ago, according to Refinitiv.

“In this environment, where we do not get paid adequately for the product we produce, we will reduce activity and focus on maintaining our financial strength,” Travis Stice, chief executive of Diamondback Energy said last month before cutting output nearly 5%.

(For a graphic, click here: https://tinyurl.com/y9642mwz)

Pickering’s CIO expects between 3 million and 5 million barrels per day of shut-ins over the next couple of months.

“Production cuts are going to be substantial for many companies. Where they occur, why they occur and how long they last will be important variables,” said Pickering.

Parsley Energy Inc last month added and restructured oil hedges.

“This is not a time for indecision or half measures,” Parsley CEO Matt Gallagher said then. “Despite having over $1 billion in hedge settlements if oil drops to the low $20s through the end of 2021, we will continue to evaluate unhedged returns when prescribing activity levels.”

Graphic: Oil prices needed to profit in U.S. shale , https://fingfx.thomsonreuters.com/gfx/editorcharts/GLOBAL-OIL-SHALE-COSTS/0H001R8GDCBQ/index.html

(Reporting by Arathy S Nair and Arunima Kumar in Bengaluru; editing by Gary McWilliams and Marguerita Choy)