Has shale mania hit its peak?


Marathon Oil’s $3.5 billion deal to buy 141,000 acres in the Eagle Ford shale appears to be something of a high-water mark for the drilling and production storm that’s been called The Shale Gale.

On a straight dollars-divided-by-acres basis Marathon paid close to $24,800 per acre — which struck a number of analysts as a whole heck of a lot to pay for the right to drill on a piece of South Texas land.

Including the value of the 7,000 barrels of oil equivalent already flowing from the property the price comes down to something like $21,000 per acre: more reasonable but it’s still more than the past record for the Eagle Ford — the $19,375 per acre that Korea National Oil Co. paid in March for a one-third stake in Anadarko Petroleum’s Eagle Ford assets.

It begs prompts the question, did Marathon pay too much? That’s hard to say, but they certainly aren’t going to be confused with the smart money/early movers when it comes to shales.

Small to mid-sized E&Ps were the first to catch on to the potential of shale in the last decade, taking large acreage positions in fields that had been abandoned or ignored by the oil majors as unproductive years ago.

As the trend caught fire companies started to issue debt and equity to help fuel the pace of expansion, drilling furiously to avoid losing their leases (companies typically have three years to drill a lease or they lose it).

There are a number of observers who questioned the sustainability of the shale drilling expansion, however, saying the pace of production would undermine profitability. And it did, with natural gas prices having dipped into the low $4 range for more than a year.

Companies argue they can still drill profitably in that price range as shale plays are now more like manufacturing — they know where the gas is, it’s just a matter of getting drilling rigs and hydraulic fracturing crews to run as quickly and efficiently as possible. That’s why when you see reports from companies like El Paso on their shale E&P operations there’s a lot of information about driving down per well costs (even though they don’t include the acreage costs in the calculations, a fact that some see as complete BS).

But it’s still expensive. Companies like Chesapeake Energy and Petrohawk Energy, which used the debt and equity markets raise billions to fund expansions, would be in big trouble today if they had not found an exit strategy — getting deeper pocket to buy in.

Everyone from BG to BP, Shell to Chinese giant CNOOC has spent billions to form joint ventures with the smaller players. Exxon Mobil bought XTO Energy outright to get itself in the shale game. This has led to higher and higher acreage costs as the wealthier players are desperate to get a piece of the shale action. It’s created a bubble that Wood Mackenzie analyst Neal Anderson recently told us will eventually burst.

That all leads us back to Marathon’s record-breaking expenditure.

As Marathon President and CEO Clarence Cazalot told us earlier this week, not all acreage is created equal, as there are areas of the Eagle Ford with dry gas, black oil, natural gas liquids and volatile oils that all have widely disparate economics depending on the prices for those commodities. So liquids-rich acreage should naturally fetch higher prices than dry gas acreage.

Cazalot also said a publicly traded company invested in about 5,000 undeveloped acres in the Eagle Ford at about $24,000 an acre  (although we have yet to figure out who that was — any ideas?).

Analysts seem to agree Marathon needed to make a big, bold move like this to stand out as a standalone E&P company — which it will become at the end of June when Marathon’s refining business spins off to become a new publicly traded firm, Marathon Petroleum (yeah, that won’t be confusing).

“Prior to this deal, the investment case for post-split Marathon upstream was going to be a head-scratcher, other than the dreaded ‘it’s dead cheap,'” Deutsche Bank equity analysts wrote in a research note this week. “By announcing the deal pre-split and using cash on hand, the company has taken low return cash and bought higher return growth.”

But they have to execute well — get that manufacturing process to go smoothly — if they’re going to make that high price asset pay off, says Deutsche Bank.

Tom Fowler

10 Responses

  1. Dollar says:

    Well, Tom, Wall Street is not buying into your theory that this a created frenzy or a bubble. Those folks occasionally do get caught up in bubbles, but they not a bunch of rubes and bumpkins either.

    EOG remains a hot stock , with many analysts having buy recommendations, so maybe the Eagle Ford is what it is.

  2. dvdw says:

    Mr fowler your a mouthpiece for the malfeasance that is Peak OIL. this article is not even clever, you can read the same spin at the oil drum, meaning your just promoting parameters which help to keep the peak oilists relevent. Your comments about Marathon and whether they paid too much is little more than a suggestion about the FUD dynamic your journalism is paid to supply.

    duly noted that my own arrival here was through a link, submitted by a known provider of produced information.

    A man has to make a living, recognizing this, might i suggest you seek a substantial raise? Rationalize it as RISK managment.

    Mouthpieces are taking on greater Risk, as the landscapes change around you, guarantees about outputting information contrived from Too Big too Fail sources….used to be fool proof…

    Now not so much.

    There is little output in the Shale world news media, that conveys much awareness about the source and origins of shale oil. That is because leadership OIL companies old guard oiligarchs, would have preferred this development remain un tapped to enable the plausible deni able relationships thesse same companies published outlooks about as long as 10 years ago.

    Dont mind you getting paid…just saying you might consider what constitutes a days work..

    • Tom Fowler says:

      I think you’re seeing conspiracy/relationships etc. that aren’t there. This piece wasn’t about peak oil, but about the possibility that companies are overpaying for drilling assets. You don’t think it’s possible some of the companies will lots of the early acreage are happy to create this frenzy to see their own investments grow in value so they can (at least partially) cash out? And just because I reference Berman and his analysis of that issue doesn’t mean it’s about peak oil or I’m a believer of peak oil.

  3. Dollar says:

    Again, I have doubts about the info presented to potential investors. And I also have doubts about how public they make their pitches to investors.

    Companies like CHK, when they courted CNOOC or Total to participate in large JV’s, did not make a public appeal to investors. I doubt if Range or EOG needs to disclose much either.

    I’m not sure how much disclosure is demanded by the SEC, but I still doubt they are presenting the whole truth and hiding as much as possible. I think caveat emptor is fully in play.

    Reality is , these companies have reasons to both overstate and understate production levels. Especially in the early stages of a project, when they are still accumulating lease holdings. The smaller companies are wanting to attract investment, without clueing in the competition.

    And what gets reported to regulatory agencies could be about anything in between. Why they would report fact to regulatory agencies when the data can not be verified ? That is a big question.

    So why would an outsider like Berman have access to truth ?

  4. Dollar says:

    I also have to wonder, where people like Arthur Berman get their well data.

    I’ve always thought that is one area of the oil industry, where there’s not much transparency, for good reason. In fact, there could me much disinformation on well performance.

    The only reliable source of what a well is really producing, would come from first purchasers and/or state taxing agencies who assess severance taxes on those first purchases.

    And then, that may even be flawed.

    • Tom Fowler says:

      From having talked to Berman I believe much of the information is from presentations the companies make to analysts/investors, as well as regulatory filings.

  5. Dollar says:

    In the early days of the Bakken, the Peak Oilers ( such as Arthur Berman ) told us it would not last, that the wells depleted quickly, and it would have no bearing on US oil production.

    And now North Dakota is producing 500,000 bpd and they are finding that the Bakken goes on into Canada and there’s many wells left to drill.

    I think there’s a lot of Peak Oilers who have egg on their face and refuse to admit it. They are ” glass half empty ” types who bet big on Peak Oil and have lost.

    I read a book in 2005, called ” Thousand Barrels Per Second ” , by a former Chevron geophysicist Peter Terkzanian. And he made a very convincing case that Peak Oil was upon us. But since 2005, there’s been this amazing shale play discovery brought on by new technology, and this made Terkzanian’s book obsolete in just a few years.

  6. meetwoodflac says:

    I think you mean “prompts a question” or “raises a question”. To beg a question is when a proposition which requires proof is assumed without proof.

  7. KernelKlink says:

    It is quite evident that poor Marathon will really need their tax exemptions now.