As a result these “sweet spots” are disappearing quickly. Late entrants to the shale game and those in need of new leases are discovering that beyond the sweet spots, the reservoir heterogeneity and well output can vary considerably, making production more difficult and costly. These issues can and do directly impact well performance, including decline rates and production levels.
While we see definite opportunities in certain areas of the energy market, we believe that is it critical to be very selective in the energy investments one pursues in today’s environment, making active management all the more essential in this space. Through active management you are able to analyze and put together a recommendation of whether to invest or not.
In passive, index-based products, these types of challenged investment could be in a portfolio just because of the industry and size of the debt tranche, with no thought put into the investment. When one considers shale’s continuous drilling requirements for reserve replacement, lease expiration drilling pressures and the realization that shale plays are not as homogeneous as once thought, it starts to become clear that stories like this are likely going to become more commonplace not less so.
This article was written by Doug Holt, Energy Analyst for Peritus Asset Management, the sub-advisor to the AdvisorShares Peritus High Yield ETF (HYLD).