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Funds pull back from Permian as U.S. shale oil firms go into overdrive

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Cash, people and equipment are pouring into the prolific Permian shale basin in Texas as business booms in the largest U.S. oilfield. But one group of investors is heading the other way – concerned that shale may become a victim of its own success.

The speed of the recovery in the U.S. shale industry in the past year has surprised oil investors after a global supply glut led to a two-year crude price slump and bankrupted many shale firms.

Eight prominent hedge funds have reduced the size of their positions in ten of the top shale firms by over $400 million, concerned producers are pumping oil so fast they will undo the nascent recovery in the industry after OPEC and some non-OPEC producers agreed to cut supply in November.

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.

The Permian, which stretches across West Texas and eastern New Mexico, produces about 2.5 million barrels of oil per day (bpd), accounting for more than a quarter of overall U.S. crude production.

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.

There is no sign that shale producers will restrain production. They redeployed rigs and personnel quickly since prices began strengthening in 2016 and made shale profitable again; rig counts have risen by 40 percent this year in the Permian, which accounts for about half of all U.S. onshore oil rigs.

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.

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