A cadre of oil companies, seeing continued profits in shale, are mulling Royal Dutch Shell Plc’s holdings in the largest U.S. oil field as the European giant considers an exit from the Permian Basin, according to market experts.
The potential sale of Shell’s Permian holdings, located in Texas, would be a litmus test of whether rivals are willing to bet on shale’s profitability through the energy transition to reduce carbon emissions.
Shell would follow in the footsteps of other producers, including Equinor ASA and Occidental Petroleum Corp. that have shed shale assets this year, looking to cut debt and reduce carbon output in the face of investor pressure.
Shell, which declined to confirm a Reuters report on June 13 that it was weighing the blockbuster sale of its Texas shale assets, also did not comment for this story.
To showcase its 260,000 acres (105,200 hectares) in the Permian, Shell has opened a data room, according to two people familiar with the matter.
ConocoPhillips Co., Devon Energy Corp., Chevron Corp., EOG Resources Inc. and some private equity houses are all potential bidders for some or all of Shell’s Permian assets, according to analysts. ConocoPhillips and Chevron declined to comment and the others did not immediately respond to requests for comment.
U.S. oil output is still roughly 2 million bbl/d below its all-time record production of nearly 13 million bbl/d hit before the coronavirus pandemic, that made it the world's top producer.
Oil prices have rebounded in 2021 with fuel demand rising as the pandemic ebbs. Benchmark U.S. crude futures are up 49% this year to nearly $72/bbl, more than double their 2020 lows.
Against this backdrop, estimates for Shell’s acreage run from $7 billion to over $10 billion, the latter implying a valuation of almost $40,000 an acre.
That would be in line with the per-acre price Pioneer Natural Resources Co. paid for DoublePoint Energy in April, the most costly deal since a 2014-16 rush by producers to grab positions in the Permian.
Most Permian deals this year have closed between $7,000 and $12,000 per acre, said Andrew Dittmar, senior M&A analyst at data provider Enverus.
A cash deal seems preferable for Shell, which could deploy the proceeds into debt reduction or clean-energy investments. To increase the number of bidders, Shell could accept shares in the buyer or divide the land into multiple packages, people familiar with the process said.
ConocoPhillips owns acreage close to Shell’s holdings and analysts say it is a top contender for the assets. Rival Chevron also has nearby operations that could make a deal attractive, said Artem Abramov, of Rystad Energy.
Devon Energy is likely the smallest company that could bid on the acreage, according to analysts. Sven Del Pozzo, analyst at IHS, said the assets could be valuable to the Oklahoma City-based company. The company declined to comment.
Smaller competitors are less likely to buy the assets because of the size of the sale, analysts said, and because acquisition financing is limited since last year’s oil price crash.
“Financing of fossil fuels is under massive pressure,” said Paul Sankey, analyst at Sankey Research in New York. “The banks have a choice of multiple sectors to finance and it’s a lot easier for them to not finance oil, gas and coal.”
The assets are located in the Delaware Basin, the westernmost shale field within the Permian. The location deters Pioneer Natural Resources, which is focused in the Midland region, located further east.
Some producers that could qualify for financing might avoid it, said Rystad’s Abramov. Mewbourne Oil Co., the largest private producer in the Delaware, where Shell operates, has decades of good inventory in its existing acreage, making an acquisition unnecessary. The company did not respond to a comment request.
Occidental operates in partnership with Shell and is a logical fit for the property, but is still shoring up its balance sheet following its acquisition of Anadarko Petroleum, said Alex Beeker, principal corporate analyst at Wood MacKenzie. Occidental declined to comment.
U.S. crude futures are trading around $86.2 a barrel, while Brent futures are around $88.12 a barrel. U.S. crude futures were roughly flat of the morning of Jan. 20.
Halliburton Co. on July 20 reported a 33.5% jump in second-quarter profit from the previous three months, as a rebound in crude prices from pandemic lows buoyed demand for oilfield services.
Oilfield services provider Baker Hughes Co. said on July 21 its adjusted profit fell 9% in the second quarter from the previous three months and it missed Wall Street estimates for earnings, as crude producers kept a tight lid on spending.