there is hope for sea, page-49

Pretty quiet .... and with rising oil price too.

Read an interesting passage (from Reuters analysis) about how approx 144 MmBO of hedges have been added THIS QTR after the rally in oil price. Apparently that's more in this Qtr than anytime in last 3 years.

The implication is US is on track to surpass 10MmBO per day (all time record production) in 2018.

Supply and Demand. Demand and Supply. The balance must be found. OPEC/KSD cuts, conventional declines, (expected) global demand growth of 1.5MmBO per day. Will it balance?

Hedging (can) be a leading indicator of price. Citigroup analysis showed a jump to 27% hedged (whereas 2015 was 15% ).

To put it in perspective using Lonestar's guidance for 2018
midpoint of production = 10,250Boepd
Oil % (not liquids) ~63% or ~ 6,520 bopd
Hedged (via fixed swaps at $51.79) for 4,695 bopd or ~72%

Definitely protected on the downside if supply overwhelms demand and price drops and WTI averaged $41.79

2018 Hedge gain of $10/bo x 4,695 x 365 = $17,136,750
2018 Oil sales = 6,695 x 41.79 x 365 = 102,121,178
Oil Revenue after hedging impact = $119,257,928
Avg price net of hedging = $48.80

But on the upside and for simplicity assuming WTI averaged $61.79 for 2018 and Lonestar averaged production of 6,695 bopd for 2018, then

2018 Hedge loss of $10/bo x 4,695 x 365 = ($17,136,750)
2018 Oil sales = 6,695 x 61.79 x 365 = 150,994,678
Oil Revenue after hedging impact = $133,857,928
Avg price net of hedging = $54.78

Plenty of analysts forecasting a 2018 WTI average of $55.

Don't know if this is still current for SEA hedging
3,249 Bopd hedged at $54.40 ceiling and $49.54 floor
SEA Guidance for 2018 (oil ) production ??? use 10,000 boepd and 70% = 7,000 bopd

Applying same averages for WTI on downside and upside as used for Lonestar

2018 Hedge gain 3,249 x 365 x (49.54 - 41.79) = $9,190,609
2018 Oil sales = 7,000 x 41.79 x 365 = 106,773,450
Oil Revenue after hedging impact = $115,964,059
Avg price net of hedging = $45.39

2018 Hedge loss = 3,249 x 365 x (61.79 - 54.40) = ($8,763,690)
Oil Sales = 7,000 x 365 x $61.79 = $157,873,450
Oil Revenue after hedging impact = $149,110,000
Avg price net of hedging = $58.36

So what does it tell you???
SEA has greater leverage to the upside when oil prices rise
LNR has greater protection to the downside when oil prices fall
Expect less variability in avg price for LNR since much higher ratio of hedging

BOTH companies (especially Lonestar) need to hit their production forecasts else they could run into cash flow problems from spikes in oil price.

Quite a strong recovery in (large) US E&P (e.g. COP, DVN). Hopefully the small guys (less than 20,000 boepd) catch the updraft in 2018!