Eight hedge funds have pulled out more than US$400 million in positions in ten big shale oil and gas companies active in the Permian, Reuters reported, as the financial industry starts to get nervous about the growth prospects of the shale drillers amid declining oil prices.
The Permian has seen major inflows of investment as production costs there have declined the most and resources are abundant. Yet despite the much-praised achievements in operating efficiency in the U.S. shale play that have brought production costs down, international crude prices have been falling too, and investors are starting to worry that shale drillers are cutting the branch they are sitting on.
Reuters, which analyzed data about investments by hedge funds in the Permian, quoted one portfolio manager from a Dallas-based investment firm as saying that, “We'll have to see if these U.S. producers have the discipline to not go crazy and keep prices where they keep making money.”
This pullout from hedge funds may be the first sign of changing sentiment about the Permian. The last year or so has seen a lot of energy companies sell their assets elsewhere in order to boost their footprint in the Permian. Private equity has also been very active in backing Permian-focused entities, spending US$19.8 billion on new ventures in the U.S. oil and gas industry – a threefold increase on an annual basis, according to data from Preqin. Most of this US$19.8 billion went into the Permian.
Although this recovery of shale drilling has been welcomed by the industry and by banks, there have been warnings, notably from Continental Resources’ Harold Hamm, who said at this year’s CERAWeek in March that should the U.S. oil industry embark on another spending spree, it could “kill” the market. Acknowledging the possibility of a substantial rise in U.S. crude oil production thanks to shale, he added “But it’s going to have to be done in a measured way, or else we kill the market.”
By Irina Slav for Oilprice.com
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