The night skies shine with gas-filled stars—tiny, dying white dwarfs, blue supergiants and blown-out supernovas stretching across the sky.
The shale plays in the Lower 48 occupy a much humbler, but lucrative, constellation. The tricky part is when the brightly shining Marcellus and the collapsing Barnett orbit the same deal.
In September, Rice Energy Inc. (NYSE: RICE) agreed to buy Vantage Energy LLC’s Marcellus assets for $2.7 billion, including $600 million in assets it will drop down to its midstream company.
Vantage threw in 57 square miles of the Barnett. Consensus value: next to nothing.
Since April, Rice has clearly wanted Vantage’s Greene County, Pa., Marcellus acreage. Rice was the designated stalking horse bidder on 31,323 net acres being sold by bankrupt Alpha Natural Resources Inc. Rice offered $200 million for the acreage, which is adjacent to its own acreage in Greene.
In May, however, Vantage swooped in with a $339.5 million bid. Showing discipline, Rice walked away from a bidding war.
Roughly four months later, Rice is cutting a vastly bigger check for 85,047 net Marcellus acres. The tagalong to the deal—37,000 Barnett acres—barely registered on analysts’ radar screens.
Rice’s deal raises two questions. Does the Barnett make any sense for Rice (or anyone)? And, had Rice won the Greene acreage bid earlier this year, would it still have purchased Vantage?
Gabriele Sorbara, an analyst at The Williams Capital Group, told Hart Energy he thinks Rice would still be after Vantage.
“This is a great transaction with acreage/midstream synergies and inventory expansion potential,” Sorbara said. “Overall, we think the Rice team got Vantage at a reasonable valuation.”
For investors, “reasonable valuation” may not sound too attractive.
However, depending on how the calculator spins, Rice got a fair-to-solid deal. Vantage bought all of Alpha’s Greene County acreage at $12,400 per acre.
Backing out the deal’s midstream value and using $3,000 per flowing million cubic feet equivalent for production, Rice is paying about $10,600 per acre, said Jonathan D. Wolff, an equity analyst at Jefferies. Wolff assigned no value to the Barnett acreage.
Seaport Global Securities suggested Rice paid more: about $12,000 per acre.
Sorbara’s math put the Marcellus acreage at about $12,971 per acre. He noted that Rice will walk away from the deal as a leading Appalachia player with 231,000 net acres and 1,164 drilling locations—an increase of 66%.
Analysts generally lauded the deal.
That just leaves the Barnett.
Daniel J. Rice IV, Rice’s CEO, made it clear on a Sept. 28 conference call that the acreage isn’t a high priority.
“It’s certainly not a core focus for us,” he said. “It came with the fantastic assets in the Appalachian, where 99% of our focus is going to be.”
He added that the Barnett is a long-lived production property that is 97% HBP. “We have plenty of time to ultimately figure out what we want to do with it.”
It’s worth noting that the Barnett is responsible for one-third of Vantage’s production and, as Cowen & Co. said, it could provide Rice with Gulf Coast optionality.
Perception may be a factor in the North Texas play.
In August, Chesapeake Energy Corp. (NYSE: CHK) celebrated its divestiture of about 215,000 net Barnett acres and 65 thousand barrels of oil equivalent per day—despite receiving no money from the buyer. Chesapeake’s move eliminates billions of dollars in future expenses and even paid $334 million to get out of its midstream commitments.
Lost in the commotion was French oil and gas company Total SA (NYSE: TOT) exercising an option to buy Chesapeake’s 75% stake in the Barnett in early September.
Total will pay $558 million to restructure its gas gathering agreements and eliminate minimum volume commitments as it captures 100% working interest on 215,000 net acres.
Guy Baber, senior research analyst for Piper Jaffray & Co., said “we ultimately believe there are better ways to spend $500 million and that the Barnett should not be competing for capital in the Total portfolio for the next few years.”
Some Barnett areas continue to produce strong results. The play is simply not commanding valuations above PDP value, Sorbara said.
But as the Haynesville works its way through its own resurgence—one that has brought it to the attention of potential buyers—the Barnett may be worth a closer look.
While it is far removed from its days as a premier U.S. shale play, it holds remarkable reserves—53 trillion cubic feet of gas. In December 2015, the U.S. Geological Survey found the Barnett has twice as much natural gas reserves as once thought.
The Barnett may be burning dimly among gassy U.S. shale plays. But as astronomer Phil Plait once observed, the brightest stars in the sky live for the shortest amount of time.
“Feel free to extract whatever life lesson you want from that,” he said.
Darren Barbee can be reached at firstname.lastname@example.org.
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