Technical Tuesday: Shell sells an asset
Buy low, sell high. Seems like a really easy concept. The problem? Emotions. Emotion always seem to get in the way of sound decision making. Last week, Shell reached an agreement to sell it’s Appalachia shale gas assets to National Fuel for $541 million (and… if National Fuel wishes, it can pay $150 million of the proceeds in common stock). Said Shell “The transaction is part of divesting non-core assets and in line with Shell’s Shale strategy which focuses on development of higher margin, light tight oil assets.” If ever there was an argument that the majors needed to be more nimble, it’s that the closing date of the transaction is January 1st and between then and now… shale oil has been left for dead while shale gas is the only place left to invest in the United States. With the sale of 450,000 net acres, 350 producing wells and 250 net mmcf/d, National Fuel Gas (NFG) appears to have gotten a steal of a deal, especially considering Shell bought the asset for $4.7 billion in 2010. So what gives? Was it a bad decision on Shell’s part?
Let’s start with the production and performance profiles.
Asset well performance since 2015 has been pretty consistent, and with the exception of the ramp up in production from early 2017 – the back half of 2018, the asset has chugged along at ~300 mmcf/d gross operated.
If we separate sale price from strategy (at $2,200/mcfed, NFG would have bought this asset at ~$2.50/mcfe PDP strip price and not paid anything for the acreage- that gas isn’t $2.50 and drilling isn’t economic shows that valuation wise, it’s probably fair) this deal shows what the future of the oil and gas world looks like. NFG is a developer, transporter, storer and distributor of natural gas and oil resources. It is fully integrated in the NE USA with assets in New York State and Pennsylvania producing 610 mmcf/d with 785,000 acres (pre Shell acquisition). With 743,400 customers, it has the operational scale to react to changes in commodity prices and has the scale to keep the cost of capital low enough to withstand the cycles. With a 4.1% dividend yield, it’s also outperformed the stock price of Shell over the last 3 month, 6 month, 1 year and 5 year time horizon. This is not a buy or sell recommendation… it’s just facts.
In January, on one of the first HTOTD podcasts, we visited with Chris Kalnin, and admittedly, I was pretty skeptical of the natural gas thesis at the time, certainly over a 1-3 year timeframe. He talked about owning the full value chain from production, through midstream to power and distribution. Unquestionably, it’s the correct model, but with gas trading below $2.00/mcf, it seemed like a really difficult way to generate returns.But, March 7th changed the investment thesis for oil AND gas in the US, and with the coming declines in oil AND 15-20 bcf/d of associated gas, things are looking brighter for natural gas players than they have in many years. Timing is everything in this industry.
So, could Shell have gotten more for the asset by waiting? Perhaps. But clearly, Shell wasn’t able to maximize the integration from wellhead to consumer, and in an era of difficult portfolio optimizing decisions, this decision seems logical. Moreover, it points to the reason why “natural buyers”, such as NFG, will eventually be the consolidator of all regional assets because they are able to leverage their fully integrated business model to maximize returns to shareholders. And that’s why consolidation is a must.
Shell had been trying to divest this asset for several years; and yes, NFG got a gem of a deal! Timing is everything in Appalachian gas. Why don’t you do an analysis of SWN’s disastrous acquisition of the WV CHK position in late 2014? It closed at just shy of $5Bn, had massive title failure, and after selling most of their core assets (Fayetteville) their market cap has struggled to stay above $1Bn last year. BTW: the nameless VP-Land who advised SWN to purchase the asset without due diligence? He got a plum job at Chesapeake!
I think you just did!!
Paul, that doesn’t sound quite right to me. Disastrous acquisition? Without question. But the commentary on the “certain VP” – that’s not how I remember it. Due diligence was performed, and the purchase price was adjusted by ~$400MM for title and environmental defects, plus SWN taking on other liabilities (announced price: $5.38B, closing price: $4.975B).
Look a little bit closer at the filings of that era and you might find certain bonuses tied to the closing of acquisitions and their timing. You might find that someone had a 7-figure reason to close ASAP, and the “one-time” reduction in price helped meet that goal…the beneficiary of that bonus was not the “VP” you reference in your post.
Circling back to NFG-Shell, the purchase price looks a little inflated to me. Tough to compare with other deals because there haven’t been many in Appalachia of late. The remaining Marcellus inventory is thin, the Utica unproven and more expensive to drill. I don’t know enough about NFG to say they won’t make money, but the consensus opinion among those in the basin is that they overpaid. Believe the package included some midstream assets, which complicates the “price/flowing mcf” metric.