Monday, September 30, 2013

Hells Bells! Shell Sells Wells!

So why does an oil industry major sell working gas wells?

Shell Plans to Sell Stake in Eagle Ford Shale - WSJ

The explanation tossed out is that Shell and other majors came late into the game, overpaying for assets.

Okay. This would explain a decision to sell acreage. But selling working wells indicates that the money flowing from these wells is not good enough to make owing them worthwhile for Shell. (Indeed, the original WSJ report reported "the assets weren’t meeting the company’s profit targets") Can the smaller buyer (with less overhead, perhaps) can deal with a lower margin? We'll see.

A month ago, after reports of write downs of shale assets by many companies, it was suggested that

The companies are turning instead to developing current projects, unable to justify buying more property while fields bought during the 2009-2012 flurry remain below their purchase price, according to analysts.

As Fadel Gheit, an analyst at Oppenheimer & Co. Inc. was quoted in the above link:

“People do not sell unless they really need the money to invest in better options,”

And one of those options seems to be a gas-to-liquids plant. So Shell is betting on cheap gas, as long as someone else is producing it.

But for a sunnier outlook, there is always Forbes:

According to a report released by the Wood Mackenzie firm in early January, Eagle Ford is now the largest oil and gas development on the face of the earth based on total capital expenditures. In the coming years, Wood-Mac believes total investment in the play will surpass even the $116 billion projected to be invested in the Kashagan project in Kazakhstan.

Of course, it is certainly not the largest in terms of production. Not even in Texas.


Colm Barry said...

"... why does an oil industry major sell working gas wells?" - Yes, why would they? Because they see that this shale boom is doomed and the oil and gas industry suffers from a law of diminishing returns. And they, as anyone who has competitive intelligence to protect, will publicly give no "honest" reason but one that maximizes profits (or minimizes losses). Such reacts a prudent investor ...

Gerald B said...

Funny. You guys need to take a course like

Majors selling their interests in operational wells is pretty darned common. The front office simply wants free cash flow for other purposes. That and the time cost of money of yesterday's investment versus the cash/credit cost differential for next year's project(s). IF rates go up (and how couldn't they?!) then this is a pretty bright margin call.

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