This week’s anecdote, insight, or observation
Shell may be walking away from Vaca Muerta, Argentina’s huge and increasingly visible shale play.
That’s interesting on its own.
But it caught my attention even more because last week I wrote about Harold Hamm making a move into Vaca Muerta, even as Continental Resources paused drilling in the Bakken.
It’s the same resource, with the same geology. But we find two opposite conclusions about its future.
According to Reuters, Shell’s assets “are likely to be valued in the billions of dollars.” That’s not a small tweak to the footprint, even for an operator as large as Shell.
It’s a sign the company wants to retrench, and that expected returns from Argentina are likely to fall below what they can achieve across the rest of their portfolio.
The timing is interesting.
Reuters notes that interest in Vaca Muerta is growing. That’s in part evidenced by the recent Continental announcement.
Shell may be testing the valuation waters.
The global upstream sector has ramped exploration spending way down over the past 10 to 15 years. Operators are starting to scramble for new reserves.
Shell may hypothesize that desperation has driven Vaca Muerta valuations above where the risk-return profile can justify.
With Shell’s deep institutional knowledge around exploration, management could figure it’s worth selling near the top of the hype cycle and deploying those billions into debt management or other capital programs in which it has more confidence.
This is a great example of how two enterprises can approach the same asset in very different ways.
Shell is a massive publicly traded company with an asset base that spreads across the globe and throughout upstream, midstream, and downstream segments.
Continental is a large operator, but it has nowhere near Shell’s financial resources. It also doesn’t have to expose its books to the world or defend capital pivots in public markets.
Shell can afford to sell at peak enthusiasm and redeploy elsewhere.
Continental, hunting for inventory, sees upside Shell doesn’t need.
We’re in a phase of upstream oil & gas where longevity and ultra-low breakeven prices matter more than ever. Shell and Continental are showing us there’s no single right answer, just different games, played by different players, with different challenges and opportunities.
