U.S. exploration and production (E&P) companies slightly increased their 2018 oil hedging during the second quarter, with 2019 still around normal levels, even though oil futures inched above long-term budgets of $50-55/bbl, according to a review by Goldman Sachs.

Analyst Brian Singer and his team reviewed where covered E&P hedging activity stood at the end of June versus what it was at the end of March. There was “minimal change,” he said.

Post-2Q2018, E&Ps were 52% hedged for oil, 3% above an equivalent 49% at the end of the first quarter. For 2019, hedging had climbed to 23% from 16% post-1Q2018 results.

“Current hedged prices of $60/bbl for 2019 are slightly below oil strip prices of $63/bbl for 2019,” Singer noted. “While this may provide some level of restraint (in addition to greater focus on capital discipline) to ramping activity…E&Ps on average raised their 2018 capital budgets by 7% on average with second quarter results.”

Hedged oil/liquids production for 2019 “is roughly in-line with historical averages two quarters ahead of the start of the next year,” he said.

Goldman analysts expect increased capital expenditures (capex) to have little impact on 2018 oil production growth overall, and they have lowered estimates for second half output by 1%. However, “we expect slightly higher (0.4%) 2019 growth as a result of incremental capex spent this year.”

On the natural gas side, covered E&P hedging for 2018 was roughly flat at 51% in the second quarter, versus 50% in the first quarter.

Gas producers covered by Goldman also had hedged 28% of 2019 output in the second quarter, which is slightly above the five-year seasonal average of 26%.

“Weaker balance sheet companies remain relatively better hedged, and 34% of 2019 covered company oil growth comes from six of 32 non-gassy E&Ps that are hedged less than 10% for oil in 2019,” Singer said.

Most of the production growth this year will be from well-hedged E&Ps, although that may be less so in 2019, according to Goldman.

This year’s hedging is being done at an average price of $58/bbl West Texas Intermediate (WTI), below current strip pricing of $65, and “is likely one of the drivers of E&P capital discipline as hedges in place help reduce cash flow volatility and allow producers to execute on planned guidance within a $50-60/bbl WTI oil price range.”

A “meaningful portion” of this year’s oil production growth may be driven by the better hedged E&Ps, with an estimated 48% of growth from 24 covered oil-weighted producers that were more than 50% hedged.

“In contrast, based on hedges disclosed for 2019 thus far, we see only three of 32 (ex-gassy) E&Ps with more than 50% of oil production hedged, and expect the bulk of year/year production growth (34%) to come from producers that are hedged at 10% or less,” Singer said.

Price exposure in the Permian Basin’s Midland remains a key concern as takeaway constraints and widening differentials begin to pressure operators. Those concerns came into sharper focus during second quarter conference calls.

“With second quarter earnings, while most were noncommittal regarding reducing/shifting capital in/away from the Permian, some such as Noble Energy Inc. cited constraints/pricing concerns as rationale for reallocation of capital to other basins in the second half of 2018,” Singer said. Noble is shifting some capex to the Eagle Ford Shale and Denver-Julesburg Basin to adjust for the lack of Permian takeaway.

Goldman is forecasting an $11.50/bbl spread on average in 2019 between Midland-WTI.

The temporary period of wider Midland differentials “will have both a cash flow and potentially volume impact for select producers,” said Singer, but “we have seen many E&Ps move to mitigate Midland price exposure through a combination of firm transport contracts and/or Midland basis hedges.”