Concerned by an imminent crash in oil price following uncontrolled pumping of crude into an already saturated global market, investors in oil industry are now holding back investible funds in search of alternative ventures.
Eight prominent hedge funds have reduced the size of their positions in ten of the top shale firms by over $400 million over fears of overproduction are pumping oil into the international oil market, according to Reuters reports.
The funds, with assets of $286 billion and substantial energy holdings, cut exposure to firms that are either pure-play Permian companies or that derive significant revenues from the region, according to an analysis of their investments based on Reuters data.
“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,” said Gary Bradshaw, portfolio manager at Dallas-based investment firm Hodges Capital Management.
Hodges Capital owns shares of Permian play firms, including Diamondback Energy Inc, RSP Permian Inc and Callon Petroleum Co. Bradshaw’s firm has maintained its exposure to the Permian.
Hedge funds pulled back in the first quarter, according to the most recently available regulatory filings, and the stocks have continued to struggle as oil prices have come under renewed pressure.
The value of these funds’ positions in the 10 Permian companies declined by 14 percent, to $2.66 billion in the first quarter, the most recent data available, from $3.08 billion in the fourth quarter of 2016.
Hedge funds have continued to reduce their exposure to energy stocks in the second quarter, said Mark Connors, global head of portfolio and risk advisory at Credit Suisse, though he could not provide figures specific to shale companies.
Fund managers interviewed expressed concern that volatile oil prices along with rising service costs and acreage prices are not reflected in overly optimistic projections for the Permian.
The funds analyzed include Pointstate Capital LP, a $25 billion fund with 16 percent in energy shares, and Arosa Capital Management, a $2.1 billion fund with more than 90 percent of assets in energy stocks. Pointstate and Arosa declined comment.
“Margins will continue to be squeezed by a 15 to 20 percent increase in service costs in the Permian basin,” said Michael Roomberg, portfolio manager of the Miller/Howard Drill Bit to Burner Tip Fund.
A Reuters analysis of 10 Permian producers, including several that almost exclusively operate in Texas, carry an average price-to-earnings ratio of about 35, compared with the overall energy sector’s P/E ratio of about 17.8.
However, there are no signs yet that shale producers will restrain production.