Royal Dutch Shell (NYSE: RDS-B ) is an industry giant on a scale with ExxonMobil (NYSE: XOM ) . When it invests it invests big. Although a $2 billion write off against U.S. shale assets, and the sale of shale properties, might be perceived as an admission of an investment mistake, it isn't as bad as it looks. Indeed, U.S. drillers should be happy for the news.
ExxonMobil and Shell both spent heavily to acquire significant positions in U.S. shale plays. Exxon purchased XTO Energy for $40 billion and Shell built its stake via several smaller acquisitions that added up to big bucks. Those were the heady days, when getting property to drill was more important than drilling results because new techniques had made once hard to reach oil and natural gas accessible.
Now that the land grab has pretty much ended, companies are starting to get a handle on what they own. Exxon, for example, noted at the company's 2012 annual meeting that "Maybe we were off a year or two" on the timing of the XTO purchase. Shell's write off and sales, meanwhile, show that the company has obviously decided that what it owns isn't quite as great as it once thought. However, recent remarks from Shell's CEO hold promise for the shale industry.
"We only talk about the Bakken, Eagle Ford, and the Permian in West Texas, and the Marcellus — we never talk about the basins that have not worked," the company's CEO said at a recent event. "And I'm afraid that some countries may be setting themselves up for dashed expectations. Take Poland, for instance, where a number of operators have announced that they're pulling out."
Taking the next logical step
Essentially, Shell is saying that the United States has some great shale plays, but not every shale play measures up. It's getting out of the ones that aren't working. And, here's the exciting part, every country in the world isn't set for an energy bonanza.
In other words, the world isn't likely to find itself awash in gas and oil. That means the United States really does appear to be having an energy renaissance of a sort. Although re-gearing the country to export energy resources will take some time after years of importing fuels, once that transition is made, the current domestic supply/demand imbalances will fade.
Both Exxon and Shell are big shale players and deserve a look by more conservative investors, particularly because of their long histories of regular dividend payments. Exxon currently yields around 2.9% while Shell yields about 5.3%. Neither, however, offers focused exposure to the maturing shale revolution. To gain that exposure, investors should consider a low-cost operator like Ultra Petroleum (NYSE: UPL ) .
Small and cheap
Ultra Petroleum's recent $650 million purchase in the Uinta Basin has worried some market watchers. That news, however, shouldn't overshadow the fact that Ultra can profitably pull natural gas out of the ground despite gas prices hovering near all time lows. And its oil business is equally as sound, particularly with oil at still elevated levels.
The massive loss Ultra Petroleum put up in 2012 might also cause you to pause in your tracks. However, that red ink was caused by a $2.9 billion non-cash write down due to low natural gas prices. The company has been profitable so far in 2013.
After such a large build up, it isn't surprising that U.S. shale plays aren't all they were hyped to be. Still, that not every shale opportunity panned out is a good thing for the U.S. energy industry since it means that the U.S. experience isn't likely to be replicated the world over. That will eventually turn big shale bets by ExxonMobil and Shell into winners. Ultra Petroleum, meanwhile, is making money today with its shale plays.
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