Released June 23, 2014 | SUGAR LAND
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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Royal Dutch Shell plc (NYSE:RDS-A) (The Hague, Netherlands) is selling its acreage in the Eagle Ford Shale to Sanchez Energy Corporation (NYSE:SN) (Houston, Texas) for about $639 million, continuing the super-major's asset sales and portfolio repositioning. Shell bought that acreage a few years back for an estimated $1 billion. Last summer, the super-major took a $2.1 billion write-down on the value of its Eagle Ford assets.
The asset sale to Sanchez, announced May 21, includes Shell's 100% working interest in approximately 106,000 net acres in Dimmit, LaSalle and Webb counties, Texas, as well as about 176 operated producing wells and associated field facilities and infrastructure. In the first quarter of 2014, Shell's net production from the Eagle Ford was approximately 24,000 barrels of oil equivalent per day (boe/d). Approximately 60% of production was crude and natural gas liquids (NGL).
Shell's Eagle Ford asset sale follows the sale of assets in the Mississippi Lime formation in Kansas, its Utica Shale acreage in Ohio, and a portion of its acreage in the Niobrara Basin in Colorado. These assets were sold as part of Shell's restructuring of its North American shale oil and gas investments. The company said it planned to "focus on acreage positions that can reach the scale required by Shell."
Shell also plans to delay exploring for oil off Alaska's coast for at least a year. That high-profile but repeatedly delayed project has consumed about $2 billion of Shell's capital over the last three years.
Earlier this month, Shell decided to sell most of its stake in Australia's Woodside Petroleum, for which it hopes to receive about $5.7 billion. In early 2014, Shell sold its stake in Australia's Wheatstone LNG project to the Kuwait Foreign Petroleum Exploration Company National Oil Company for about $1.1 billion.
Shell's capital budget reportedly rose to about $45 billion in 2013, up from about $27 billion in 2007. But as development costs rose and milestones were missed on large-scale projects, investors and lenders began pressing Shell and other super-majors to rein in spending and focus on developing its most promising assets. Despite continued high oil prices, the stock prices for large oil companies like Shell have lagged compared to independent exploration companies. Shell has a goal of selling about $15 billion of assets around the world.
"We are refocusing our investment to where we can add the most value with Shell's capital and technology," Shell's chief executive, Ben van Beurden, said in a January statement announcing the sale of the Wheatstone project. "We are making hard choices in our worldwide portfolio."
"All too often, Shell's answer to an issue or problem is that the market is being too short-term, that Shell takes the long-term view, and that in the long-term, the company's approach will be proved right," said Lucas Herrmann, an analyst at Deutsche Bank in London, in a note to clients after the Wheatstone sale was announced. "Sadly, we would argue that the weight of evidence is, if anything, against the company." Herrmann's remarks were reported by The New York Times.
Unlike most super-majors, Shell's global asset portfolio was weighted more to gas than oil. But big investments in large, complex gas projects haven't yet paid off, despite high prices for the commodity outside North America. The collapse of gas prices in the U.S. between 2008 and 2012 made some gas investments in the U.S. uneconomic. For more on Shell's strategic investments in natural gas, see August 16, 2013, article - Shell Executive: LNG to Account for 20% of World's Energy by 2020.
Click on the image at right for average U.S. wellhead natural gas prices between 2001 and 2012.
Shell is not the only super-major going through a major reshuffling of its upstream assets. BP plc (NYSE:BP) (London, England) sold about $38 billion of assets from 2010 to 2013, mainly to fund litigation and reparations from its Macondo well disaster in the Gulf of Mexico. Last year, the company said it plans to sell another $10 billion of non-core assets by year-end 2015. Chevron (NYSE:CVX) (San Ramon, California) recently announced the sale of its interest in some oil fields and pipelines in Chad for about $1.3 billion, part of its strategy to divest about $10 billion worth of non-core assets by 2017. Exxon Mobil (NYSE:XOM) (Irving, Texas) recently sold some of its acreage in the Utica Shale to American Energy Partners LP (Oklahoma City, Oklahoma).
"The Eagle Ford is a very prolific formation, but Shell's decision to sell its assets there makes sense, because the company would never be able to produce meaningful results for a company as large as Shell," said Jesus Davis, Industrial Info's vice president of research for the Oil & Gas Production, Pipelines and Terminals industries. "We see this phenomenon over and over in the industry: When investments by small, scrappy independents are successful, super-majors tend to come in late, over-pay for acreage and assets, and then sell later at a loss. At some point, the size of super-majors like Shell creates diseconomies of scale: companies get so big that only the largest elephant discoveries will meet management's goals and satisfy investors. But there are only so many elephants around, and investors tend to have little appetite for 10-year projects that cost billions of dollars to develop."
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.
The asset sale to Sanchez, announced May 21, includes Shell's 100% working interest in approximately 106,000 net acres in Dimmit, LaSalle and Webb counties, Texas, as well as about 176 operated producing wells and associated field facilities and infrastructure. In the first quarter of 2014, Shell's net production from the Eagle Ford was approximately 24,000 barrels of oil equivalent per day (boe/d). Approximately 60% of production was crude and natural gas liquids (NGL).
Shell's Eagle Ford asset sale follows the sale of assets in the Mississippi Lime formation in Kansas, its Utica Shale acreage in Ohio, and a portion of its acreage in the Niobrara Basin in Colorado. These assets were sold as part of Shell's restructuring of its North American shale oil and gas investments. The company said it planned to "focus on acreage positions that can reach the scale required by Shell."
Shell also plans to delay exploring for oil off Alaska's coast for at least a year. That high-profile but repeatedly delayed project has consumed about $2 billion of Shell's capital over the last three years.
Earlier this month, Shell decided to sell most of its stake in Australia's Woodside Petroleum, for which it hopes to receive about $5.7 billion. In early 2014, Shell sold its stake in Australia's Wheatstone LNG project to the Kuwait Foreign Petroleum Exploration Company National Oil Company for about $1.1 billion.
Shell's capital budget reportedly rose to about $45 billion in 2013, up from about $27 billion in 2007. But as development costs rose and milestones were missed on large-scale projects, investors and lenders began pressing Shell and other super-majors to rein in spending and focus on developing its most promising assets. Despite continued high oil prices, the stock prices for large oil companies like Shell have lagged compared to independent exploration companies. Shell has a goal of selling about $15 billion of assets around the world.
"We are refocusing our investment to where we can add the most value with Shell's capital and technology," Shell's chief executive, Ben van Beurden, said in a January statement announcing the sale of the Wheatstone project. "We are making hard choices in our worldwide portfolio."
"All too often, Shell's answer to an issue or problem is that the market is being too short-term, that Shell takes the long-term view, and that in the long-term, the company's approach will be proved right," said Lucas Herrmann, an analyst at Deutsche Bank in London, in a note to clients after the Wheatstone sale was announced. "Sadly, we would argue that the weight of evidence is, if anything, against the company." Herrmann's remarks were reported by The New York Times.
Unlike most super-majors, Shell's global asset portfolio was weighted more to gas than oil. But big investments in large, complex gas projects haven't yet paid off, despite high prices for the commodity outside North America. The collapse of gas prices in the U.S. between 2008 and 2012 made some gas investments in the U.S. uneconomic. For more on Shell's strategic investments in natural gas, see August 16, 2013, article - Shell Executive: LNG to Account for 20% of World's Energy by 2020.
Click on the image at right for average U.S. wellhead natural gas prices between 2001 and 2012.Shell is not the only super-major going through a major reshuffling of its upstream assets. BP plc (NYSE:BP) (London, England) sold about $38 billion of assets from 2010 to 2013, mainly to fund litigation and reparations from its Macondo well disaster in the Gulf of Mexico. Last year, the company said it plans to sell another $10 billion of non-core assets by year-end 2015. Chevron (NYSE:CVX) (San Ramon, California) recently announced the sale of its interest in some oil fields and pipelines in Chad for about $1.3 billion, part of its strategy to divest about $10 billion worth of non-core assets by 2017. Exxon Mobil (NYSE:XOM) (Irving, Texas) recently sold some of its acreage in the Utica Shale to American Energy Partners LP (Oklahoma City, Oklahoma).
"The Eagle Ford is a very prolific formation, but Shell's decision to sell its assets there makes sense, because the company would never be able to produce meaningful results for a company as large as Shell," said Jesus Davis, Industrial Info's vice president of research for the Oil & Gas Production, Pipelines and Terminals industries. "We see this phenomenon over and over in the industry: When investments by small, scrappy independents are successful, super-majors tend to come in late, over-pay for acreage and assets, and then sell later at a loss. At some point, the size of super-majors like Shell creates diseconomies of scale: companies get so big that only the largest elephant discoveries will meet management's goals and satisfy investors. But there are only so many elephants around, and investors tend to have little appetite for 10-year projects that cost billions of dollars to develop."
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.
