Monday, January 9, 2012

A Shale Acreage Valuation Bubble? Really?

I just perused a Bloomberg article, "Shale Bubble Inflates on Near-Record Prices," inspired by Japanese commodity trader Marubeni Corp.'s joint venture with Hunt Oil in the Eagle Ford Shale that valued the land at $25,000 per acre.  It all sounds pretty scary.  Here's the intro:
"Surging prices for oil and gas shales, in at least one case rising 10-fold in five weeks, are raising concern of a bubble as valuations of drilling acreage approach the peak set before the collapse of Lehman Brothers Holdings Inc."
The only thing missing from the sentence was "Enron" or "dot.bomb!"  These days, everyone is looking for the next big bubble since they seem to be popping around three per decade.  At that pace, the next one should be due in a year or two.

While there may be a bubble in shale drilling, I think it has more to do with natural gas over-production than the valuation of oil and gas shales.  And I'm definitely less worried about foreign companies paying U.S. producers too much money for acreage and shale expertise.  Actually, foreigners overpaying for acreage sounds more like an economic development plan (leading to jobs!!!) than a bubble popping.

True, foreign joint ventures accelerate drilling, which leads to over-production, but the article is more panicked about valuations.  But as far as I'm concerned, the big foreign players can keep tripping over themselves to pour billions of dollars into U.S. businesses.

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