Oil Investors Should Be Closely Watching This Trend

Pioneer Natural Resources (Ticker: PXD) shocked oil investors when it released their second quarter earnings last week. Shares of the shale driller went from $163 a share to under $130,and other s hale oil names fell as much as 10%.

The company reported $233 million in net income, a 4% rise in production and lower operating costs. So why did Wall Street sell off the sector? They saw this graph:

Slide_8_-_Gas_rising

 

What is so concerning?

 

As oil wells are depleted, lower pressure causes the release of additional gases that can be processed into natural gas, propane and other products. These products are essentially extras for the oil drillers, the gasses are captured by the driller and sold. While that may sounds great for the short term, typically rising gas output is a sign of the beginning of a decline in oil well production.

 

Investors fear that Pioneer, one of the bigger players in the Permian basin, where half of all oil rigs in the U.S. are set up, is beginning to show signs that the Permian is peaking earlier than originally anticipated. Not a great prospect at a time when billions of investing dollars are flowing into Permian Basin oil and gas companies.

Is Pioneer Alone?

 

Last week saw the release of other U.S. shale drillers as well. Parsley Energy (Ticker: PE) showed a similar trend:

parsley_energy_production_2Q_2017

Oil production was up 15%, while natural gas production was up 22.6% and natural gas liquids up 33%.

 

Pioneer has stated that it is seeing no decline in oil production below its forecast. The CEO told analysts that oil production is “absolutely meeting our expectations on a per-well basis, and adding more gas and [natural gas liquids] to the mix is a positive in terms of revenues and reserves without even affecting oil.”

 

 

So far, it doesn’t seem like investors believe him.

 

How can you keep an eye on this trend? Here are a few other companies that operate in the Permian basin that have recently reported quarterly earnings, or will do so soon:

 

Approach Resources (Ticker: AREX)

Cimarex Energy (Ticker: XEC)

Diamondback Energy (Ticker: FANG)

RSP Permian (Ticker: RSPP)

Ring Energy (Ticker: REI)

 

 

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