I used to use the ‘F’ word a lot.

It can be incredibly useful when making a point and, quite frankly, it’s fun to say. But 2020 has been challenging, and in many ways, has defied logic. As such, whenever I even think of the ‘F’ word (Fundamentals) whilst the Federal Reserve is printing money and screaming ‘YOLO’ at the top of their lungs, I wonder when they will matter. That thought scares me.

While SEC pricing isn’t the sexiest topic, it will be instructive this year when public companies report their YE SMOG numbers. The price deck used will be $39.54/bbl and $1.99/mcf and although engineers (like me) can figure out how to be creative with development timing, lower costs, shared facilities, and scaled back “fracs”, there are limits to what can be done. The impact? For the most part, companies will be exposed for their PDP only valuation, which, net of debt and G&A will be ugly.

And admittedly, while the forward curve is more constructive than YE20 pricing, I think the takeaway should be that E&Ps should be hedging 100% of their production next year. We saw how fast oil went from $63 to -$37 to $35 and back to $47, and when all the “profit” exists in those last few dollars, surviving long enough to see the supply-demand fundamentals take hold should be priority #1 in 2021.