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Shell's intriguing shale test case

Supermajor sold off swathes of its US shale portfolio - now some of these assets are returning to the market  

Shell sold off large chunks of its US shale and tight oil portfolio in a flurry of deals in 2013 — now some of those assets are returning to the market, creating an interesting test case for the idea that smaller US independents are better at developing shale plays than the supermajors.

Shell’s move to trim its US onshore portfolio was quick and decisive after executives admitted they had made missteps in their strategy.

Over the course of a year, it sold major asset packages in the Utica shale in Ohio, the Mississippi Lime play in Oklahoma and Kansas and the Haynesville shale in Louisiana.

Those packages were snapped up by Ascent Resources, Tapstone Energy and Vine Resources — all private equity-backed independent companies.

Tapstone and Vine have both filed for initial public offerings of shares in the past month and Ascent, which was founded by legendary wildcatter Aubrey McClendon as American Energy-Utica, is thought to be preparing itself for such an offering in the future.

Those sales will provide a glimpse into the value of the assets that Shell turned its back on three years ago.

The Vine IPO will provide the most direct comparison.

The Blackstone-backed company bought about 100,000 acres from Shell for $1.2 billion in August 2014 and it remains Vine’s only asset.

Vine posted average production of 218 million cubic feet of natural gas per day in 2016 after increasing that figure by 48% since the third quarter of 2015. 

Tapstone, meanwhile, snapped up around 600,000 acres from Shell in its Mississippi Lime deal, but the company’s valuation is being driven by its position in the north-west extension of the Stack tight oil play to the south, which it established through its own leasing efforts, showing that, in some cases, it was not bad operations on the part of supermajors, but just bad rock.

To date, much of the debate about the shale competency of supermajors versus independents has revolved around independents capitalising on the divestitures of their larger peers by increasing recoveries and decreasing costs.

But in at least one instance, Shell and  Chevron flipped the script. The pair purchased a vast swathe of acreage in the Permian basin from Chesapeake Energy in 2012.

At the time, the US independent desperately needed to cut its debt and McClendon, who still led Chesapeake, did not see as much promise in the Permian as he did in the company’s other shale holdings.

Shell alone grabbed more than 600,000 acres in what is now the heart of the Delaware basin in western Texas, where acreage prices have eclipsed $20,000 an acre and approached $50,000 in certain deals.

The supermajor did not hang on to all of its acreage but still holds at least 250,000 acres in the basin in a joint venture with Anadarko Petroleum, which analysts have valued at upwards of $5 billion.

After a slow start to the development, Shell plans to significantly ramp up production from its Permian holdings in the coming year.

Meanwhile, Chesapeake chief executive Doug Lawler said his company is looking for ways to fuel oil growth without having to buy its way back into the Permian basin at a steep price.

The new company valuations will be interesting but will probably only serve to remind us that having the right asset is only part of the game, having the desire, ability and cash to develop it are equally crucial — whether you are a supermajor or a shale independent.

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