Should Investors Fret over Shell’s Eagle Ford Exit?

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One man's trash really can be another's treasure. While I don't think Shell (NYSE: RDS-A  ) would ever describe the 106,000 acres in the Eagle Ford shale it's discarding as trash, it's certainly not a treasured asset for the company. What's important for investors to see is why the Eagle Ford can't fuel Shell's growth while it can for so many other companies.

Shell noted that the Eagle Ford did not meet its targets for size and profitability. That's because for a behemoth like Shell, 100,000 acres in the Eagle Ford wasn't going to move the needle. Shell's current global capital expenditure plan has it spending $130 billion from 2012-2015 in order to grow its production from 3.3 million barrels of oil equivalent per day to more than 4 million barrels of oil per day by 2018. To put those production numbers into perspective, Shell's entire output of the Eagle Ford shale amounts to about 32,000 barrels of oil per day after drilling more than 192 wells. That's just a drop in the bucket.

Consider on the other hand a smaller company such as EOG Resources (NYSE: EOG  ) . It's printing money thanks to its position in the Eagle Ford. That is because EOG has built scale, which includes a 639,000-net-acre position. It's also one of the top producers at 173,000 barrels of oil equivalent per day. Finally, its economics are better because it has self-sourced frack sand, which lowers its costs. Add it all up and the Eagle Ford has helped fuel real needle-moving oil production growth of 40% annually since 2010 for EOG, while producing direct after tax rates of return in excess of 100%. That's something Shell can't match.

Furthermore, consider its recently announced decision to exit the Mississippian in Kansas. Shell noted the same issues as its 600,000-net-acre position and 45 wells just were not fueling the economic returns it had hoped. On the other hand, a smaller and more nimble SandRidge Energy (UNKNOWN: SD.DL  ) is able to produce needle-moving production growth and 50% internal rates of return. Here again scale matters and SandRidge was able to use its scale to build up its saltwater disposal and electrical infrastructure around a core position. That turned out to be a competitive advantage that enables SandRidge to profit while Shell suffers.

The bottom line here for Shell is it would cost it too much money and time to build the scale it needs in the Eagle Ford shale. Exiting makes sense and it should get a fair price for that asset given the returns the Eagle Ford can fuel for a smaller company. That's why investors shouldn't fret over this news, as some of the shale plays seem to work best for nimbler independents as opposed to global giants.

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9/29/2016 4:02 PM
RDS-A $49.73 Up +1.01 +2.07%
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EOG $95.05 Up +1.09 +1.16%
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SD.DL $0.00 Down +0.00 +0.00%
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