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Royal Dutch Shell (NYSE: RDS-A ) , the Anglo-Dutch energy giant, is looking to part with its oil and gas assets in the Eagle Ford shale of Texas. The assets consist of 106,000 leasehold acres in three counties in southern Texas, where 192 wells were producing roughly 32,000 barrels of oil equivalent per day.
Shell said these assets don't conform to the company's global targets for size and profitability and would be better suited for "another experienced operator." I agree. Let's take a closer look at why the company's decision to part with its Eagle Ford acreage should prove to be a good one.
Shell's underperforming North America business
Shell's announcement comes amid an ongoing review of its North American oil and gas portfolio, which reported another loss in the second quarter and is expected to remain unprofitable for the remainder of this year and possibly longer. Indeed, due to weaker-than-expected exploration results from its North American business, Shell wrote down the value of its North American shale assets by about $2.1 billion in the second quarter.
While other firms, including BG Group and BHP Billiton (NYSE: BHP ) , have also written down the value of their North American shale assets, Shell's impairment was particularly surprising because it was related to "liquids-rich" assets, as opposed to primarily gas-heavy assets for BG Group and BHP Billiton.
From this perspective, exiting its Eagle Ford position looks to be the right move for Shell because it can allocate the proceeds from the sale to higher-return opportunities elsewhere, such as its Mars-B and Cardamom projects in the Gulf of Mexico and its Gumusut-Kakap field offshore Malaysia. Furthermore, the company's Eagle Ford acreage should be able to fetch a good price in the current environment, given the strong interest in the prolific and lucrative Texas play.
Divergent fortunes in the Eagle Ford
Part of the reason why Shell's North American business has performed poorly is because, like many of its integrated major oil peers, Shell was a relative latecomer to North American shale plays like the Eagle Ford. While smaller, nimbler energy exploration and production firms began shale drilling in the early and mid-2000s, Shell didn't acquire Eagle Ford acreage until 2010, when prices had already been bid up meaningfully.
ExxonMobil (NYSE: XOM ) similarly waited until 2010 to close on its $25 billion acquisition of shale gas producer XTO Energy -- a decision that proved ill-timed given the subsequent collapse of natural gas prices. By contrast, firms that invested in the Eagle Ford relatively early are seeing phenomenal success in the play and continue to spend heavily there.
For instance, ConocoPhillips (NYSE: COP ) plans to devote a huge chunk of its capital budget to its operations in the play -- as much as $8 billion over the course of the next five years -- where its total production roughly doubled in the second quarter from year-earlier levels. Chesapeake Energy (NYSE: CHK ) is similarly allocating the biggest chunk of its capital budget to the Texas play, which it has identified as its premier growth core asset. In the second quarter, the company's solid operational performance in the Eagle Ford helped it deliver 44% year-over-year growth in oil production.
The bottom line
Shell's decision to part with its Eagle Ford acreage is only the latest in the company's long list of asset sales. In addition to its Eagle Ford assets, the company also plans to divest 600,000 acres in Kansas' Mississippi Lime play, as well as its position in the Mahogany shale oil project in Colorado.
Indeed, over the last three years, Shell has divested some $21 billion worth of assets, of which $4 billion were sold in the past 12 months. As the company continues to rebalance its portfolio, investors can expect plenty more asset sales in the years to come, the proceeds from which can be reinvested into more attractive, higher-margin opportunities.
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