That is the question many buyers of shale gas assets should have been asking themselves over the last few months. This week’s news that shale gas high roller Range Resource was selling its Barnett shale properties reinforced our view that there is major trouble brewing in the shale gas business. Upstreamonline reported that “…Range Resources Corporation said it will sell almost all of its Barnett shale properties to a private company for $900 million…”
Then of course there is the number one shale gas play cheerleader of them all, Chesapeake Energy. Just last week they announced the sale of gas properties in the Fayetteville shale to BHP Billiton. BHP Billiton is sitting on a pile of cash after its failed attempt to takeover Potash Corp. of Saskatchewan last year so they just couldn’t resist the siren call of shale gas’s either. In Chesapeake’s case they managed to get BHP Billiton to hand over $4.72 billion in cash.
For Chesapeake the BHP Billiton deal follows on the heels of other deals done over the last year to either sell property or joint venture the risk to someone else. The reason given for the Chesapeake sales was to focus on the higher margin oil business. They didn’t mention that it might also be a move to get out of debt laden land speculation based on a questionable shale gas model.
Here is an example of Chesapeake’s confidence in shale gas; “CHK will fund shift to liquids-rich plays by decreasing gas drilling…” (Chesapeake investor presentation, Feb. 2011) Remember to look at how companies spend their money and not at what is cranked out from the public relations office. An example is this industry sponsored web page expounding on how compressed natural gas (CNG) would give the U.S. “Freedom from Foreign Oil”. If that is true why is Chesapeake shifting to liquids?
So if shale gas was going to make the U.S. energy independent why would companies like Chesapeake and Range Resources be making these moves? Is it possible the game was never about the gas to start with…?
Most important though is that there will be opportunities in natural gas; just not until more money is drilled away.
There are still other troubles ahead for shale gas production.
The New York Times: “Over the past nine months, The Times reviewed more than 30,000 pages of documents obtained through open records requests of state and federal agencies and by visiting various regional offices that oversee drilling in Pennsylvania. Some of the documents were leaked by state or federal officials. Here, the most significant documents are made available with annotations from The Times.” The NYT has an animation of hydraulic fracturing that helps understand the process available here.
Is this a game changer for shale gas? Maybe not but then maybe shale gas isn’t the game changer it is hyped as either.
Jim Hansen is an investment advisor at Ravenna Capital Management based in Seattle, Washington. He has spoken at the ASPO-USA national conference as well given other public and academic presentations. His weekly report The Master Resource Report is available online.
DISCLOSURE: Clients and Advisors of Ravenna Capital Management do not currently hold positions in CHK or RRC