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This is an update to a Jan 2017 report published by Plural explaining why we are short US shale oil producers. Since then, the S&P oil & gas exploration and production index has fallen 21% and the Plural strategy has gained 628bps in portfolio return from energy positions while maintaining a portfolio beta to oil of -0.03.
Based on our primary research and analysis we continue to think that shale oil producers located predominantly outside of the Permian basin do not have viable business models. We think that most producers are destroying value for shareholders and will continue to do so as they are the marginal cost producers in the global oil markets. In our opinion, the lower costs of Permian producers will ultimately force other basins out of the market. As production and infrastructure gets built out, the winners will likely be consumers and service providers. We identify four factors that differentiate companies: geology, geography, capital structure, and management. We are short 5 mostly non-Permian companies – Chesapeake Energy, PDC Energy, QEP Resources, SM Energy, and WPX Energy – and admire EOG Energy.