Thursday, January 8, 2015

Saudi's Oil Shock Therapy Hits Permian Trust Hard

The price movement in Permian Trust units (PER) since the beginning of September 2014 thru the beginning of January 2015 has been dramatic, dropping from over $12 per unit settling at just above $6 per unit at the 1/5/2015 close.  The severity of the move can be traced primarily to an adjustment in the market to a radical downward shift in the expectations for future oil prices.  During the summer months as the price of oil spiked up above $110 per barrel on geo-political tensions, the market sentiment was that $100 oil was here to stay, and that there was an implied floor of about $90 per barrel below which spot prices in the market would probably not breech.  However, during September rumblings in the industry began to surface that the Saudi’s were going to change the playing field.  The resulting “oil shock therapy” reverberated throughout the industry, affecting most severely the drilling services and E&P companies in the U.S. shale oil industry. 

Permian Trust units, which are heavily dependent on the future price of crude oil, were driven down in traded value because of the expected price shift.  The price movement can be visibly traced in the following chart.

One of the more intriguing aspects of the chart is the defense of $6 as the current floor as the price of oil has approached $50 on the front month contract.  Is this a potential sign that the market is entering a bottoming phase?  Or, is there another leg down possible, and if so, what is the fair value of the Permian Trust Units if this happens?  This report provides insight about the expected change in intrinsic value of the Permian units as the price war continues.

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