Tuesday, April 14, 2015

Shell's Haynesville Hokey Pokey

Last August, Royal Dutch Shell (doing business as SWEPI, LP) divested its interests in the Haynesville Shale to Vine Oil and Gas, a subsidiary of private equity giant Blackstone.  Earlier in the summer, Shell sold its interest in the Marcellus Shale to Rex Energy Corp.  Big oil has been notoriously unsuccessful exploring for shale oil and gas, as they are built to undertake massively complex and expensive projects.  Fast forward to last week's announcement that Shell is buying BG Group and suddenly Shell is back in the Haynesville and Marcellus by virtue of BG's 50/50 joint venture arrangements with EXCO Resources in each play.

Of course, this time Shell will be a financial partner and not an operator, but the transaction is pretty ironic given the recent divestitures.  But the big question is how long Shell will stay a partner in those deals?  For a company with a capital budget in the tens of billions of dollars, the JV financial obligations represent a small amount, but to make the BG deal work, Shell will have to sell off some less "strategic" assets.

Will EXCO JV interests be on the trading block?  I'm not so sure.

The Shell machine will want to have access to the gas to trade and refine.  In 2014, EXCO generated 34% of its revenue from BG Energy Merchants, LLC, a subsidiary of BG Group.  Also BG is contractually one of the biggest customers of the soon to open Cheniere LNG export facility, and LNG is one of Shell's major areas of operation.  Analysts suggest that LNG is one of the drivers of the BG acquisition, although most of the BG LNG opportunity lies abroad.  Also, for several years Shell has been toying around with building an ethane cracker in Beaver Co., PA to process Marcellus gas.  Of course, refining is another of Shell's strengths.

Natural gas is a commodity product, so just because Shell can play on both sides of the transaction doesn't guarantee that the company will want to keep its upstream interests.  In the end, the decision to keep or sell its interests in the EXCO joint ventures probably rests more with the ability of EXCO to profitably produce the gas than what Shell will do with it on the back end.  Although, given the price of gas lately, if Shell does want to sell its JV interests, it likely will be at fire sale prices, and I suspect you will see a line of private equity investors licking their chops hungry for a good deal.

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