Tuesday, October 1, 2013

Shell Selling Eagle Ford Shale Stake; What Happens in the Haynesville?

News outlets were abuzz yesterday with news that Royal Dutch Shell is selling its interest in the Eagle Ford Shale, which represents 106,000 net acres in Dimmit, LaSalle and Webb counties.  I'm not terribly familiar with Shell's acreage in the play, but the three counties in question are in the southwest portion of the play and cover the gas, wet gas and oil windows.  Shell is also unloading its 600,000 acre position in the Mississippi Lime in Kansas.

Since we are Haynesville-centric on this site, the question is whether or not Shell will unload its Haynesville assets.  Personally, I doubt it.

The impetus for the prospective sale is the recent write-down of the value of the company's Eagle
Ford assets.  This came about because Shell acquired these leases from another operator for a princely sum.  Each year the company has to "test" its goodwill, which is the premium over the accounting asset value, to make sure the asset is still worth the premium price.  Given depressed commodity prices, pretty much any acquisition with natural gas is no longer worth the premium, and Shell had to write off $2 billion.  Other producers such as BHP Billiton (Petrohawk) and Exxon (XTO) had to take similar write-downs over the past few years.

For a behemoth like Shell, that's the equivalent of trimming its toenails, but it is still embarrassing and it points out that Shell was 1) late to the game in the Eagle Ford and 2) not really equipped to operate in a shale play as effectively as a large independent.

As with many energy majors, Shell was not quick to embrace shale gas and chase the new plays, and as a result ended up having to buy out independents or make big land deals.   Many of these occurred when the market was hot and the big boys ended up overpaying.

Being the last guy in is not always a bad thing:  you get to see how things are shaking out in terms of geology and production and you can bring economies of scale and lots of cash to the table to ramp up production.  But if commodity prices dip and stay low, like they did, you end up becoming the infamous greater fool.  As often happens with the greater fool theory, they guy who buys high often sells low, so another producer might buy Shell's acreage and make a killing (and then look for another greater fool to sell to).  If you see private equity guys sniffing around at this deal, that's the plan.

But in the Haynesville Shale, Shell was an early player that already had legacy leases and didn't get too caught up in the acreage bidding wars.  They don't have to constantly test goodwill, and they didn't have to do a lot of economically risky drilling to hold leases.  As a result, Shell comfortably own its Haynesville acreage.

Generally, I don't think shale plays cater to big guys like Shell. They like epic engineering challenges where they can deploy a huge force of talent to overcome a major obstacle.  Think:  multi-billion dollar deepwater platforms and huge gas-to-liquids plants in the desert.  Drilling thousands of shale wells in a short time horizon is just not their game.  As someone pointed out to me a long time ago, Shell probably spends more time reading the safety manual that actually producing these leases.  The scrappy independents with something to prove do better in these plays (at least in my opinion).

But I think there is one important consideration to keep in mind regarding Shell's presence in the Haynesville.  The shale is close to the company's existing and planned operations along the Gulf Coast.  Shell looks at GTL/gas-to-chemical plants and LNG export as part of the company's integrated gas strategy, which Shell ranks as a growth priority.  Remember, Shell recently selected a location in south Louisiana for a GTL plant.  Being an enormous company, Shell has to look for opportunities to deploy lots of capital and achieve serious growth.  Haynesville gas feeds this growth engine, and to the extent Shell can source gas from its own upstream assets, all the better.

1 comment:

Anonymous said...

I just had a conversation last week with a producer aggregator, he told me outside of the oily side, the gas players are realizing they overpaid for the actual quality of the holdings, which are a little disappointing. I expect the 'breakeven' cost for the dryer gas side is quite a bit higher than the current price environment.

Maybe this is another reason for Shells departure.