Barnett Deal Highlights Appeal of US Shale Gas

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Devon Energy is selling its dominant position in the Barnett Shale of North Texas, following the lead of several peer companies in shedding some of the most fabled assets in the history of shale gas. Yet even as the Barnett's output is barely half of its 2011 peak, there are clearly motivations for investing in the sprawling dry-gas play despite a market that continues to be unforgiving -- including the potential for exporting gas to the world. "Buyers are viewing this time as a rare opportunity to pick up assets, if they are long-term bulls, at historically cheap pricing," explained Dallas Salazar, CEO of Atlas Consulting in Austin. "All of the recent deals, especially on the gas side, have been very, very attractive deals to the new capital coming in ... without any legacy debt or legacy cost overhang to press on asset economics," he told Energy Intelligence. So at the right price, even assets with low per-well internal rates of return can still make a decent profit. That is apparently the bet being made by privately held Banpu Kalnin Ventures (BKV), which is 100% backed by Thailand-based mining and energy giant Banpu PCL. It is paying Devon $770 million for the acreage and wells that produce roughly 597 million cubic feet of gas equivalent per day. Since 2016, BKV has spent about $1.3 billion on seven acquisitions, mainly in the Marcellus Shale, although none compared in size to the Devon deal. With the Barnett assets, BKV now has US production of 780 million cubic feet per day, according to a company statement. "This deal represents our continued belief in the long-term potential of US shale gas and is fully in line with [BKV's] vision of developing a greener and smarter energy portfolio," CEO Christopher Kalnin said. The industry has been watching as BKV has snapped up Marcellus acreage, Salazar said, but it was clear the Thai company has been searching for a core asset for its portfolio for more than a year, which this latest deal satisfies. "Our firm is seeing a lot of E&P investment interest from Asia and Europe of late, which we believe is a combination of an appetite for low-priced, high-return assets suitable to longer-term gas bulls and a reaction to an incredibly depressed low-yield Asian and European rate environment," Salazar said. "We think that the market will continue to see foreign money pouring in, across both the oil and gas streams." It’s also “hard to ignore the LNG angle” when explaining BKV’s motivation, analysts at investment bank Tudor, Pickering, Holt said in a client note. “The connections to Thailand are a natural starting point as we expect the country to be one of the largest demand growth centers over the next decade.” Thailand now consumes 4.6 million tons per year (600 MMcf/d), but TPH research suggests imports will grow to around 11 million tons/yr (1.5 billion cubic feet per day) by 2025 and 20 million tons/yr (2.6 Bcf/d) by 2030. “Given existing pipe connections out of the Barnett we see the existing, and proposed, facilities in Louisiana best positioned for a potential liquefaction contract. From a feedgas perspective, transaction metrics plus [gas processing and transportation] costs suggest supply costs in the $2/MMBtu range, with a liquefaction toll plus shipping driving a landed Thailand price in the $6-6.50/MMBtu range. We see this price being competitive globally over the long-run with upstream ownership providing an insurance policy against rising US gas prices." Exodus Led by Range, Encana, Pioneer For Devon, the deal includes the divestiture of assets acquired from Mitchell Energy in 2002 for $3.5 billion -- and are the same holdings George Mitchell and the US Department of Energy used to crack the code for efficiently producing shale gas via hydraulic fracturing techniques. But Oklahoma City-based Devon, the top gas producer in the waning play, has shifted focus. "Devon's transformation to a US oil growth business is now complete," CEO Dave Hager said. Devon was the largest -- and one of the first -- of the major players in the North Texas Basin, which was the US' prime gas play until the Marcellus Shale surpassed it early this decade. At year-end 2018, proved reserves associated with these properties amounted to 4 trillion cubic feet of gas equivalent, which Hager said "has been a cornerstone asset for Devon over the past two decades." This year, the Barnett is on track to produce 2.9 Bcf/d, its lowest total in at least 11 years, according to the Texas Railroad Commission. In the late 2000s, some of the largest US gas producers were running nearly 200 rigs in the play, with production topping 5.7 Bcf/d in 2012. But as gas prices began to decline and greener pastures opened in Appalachia, an exodus began, led by Range Resources, Encana, Carrizo Oil & Gas and Pioneer Natural Resources. Conoco pulled up stakes in July 2017, selling 68,000 net acres to Miller Thomson & Partners for $310 million (NGW Jul.3'17). And first-mover Chesapeake Energy called it quits in August 2018 when it sold its last 215,000 net acres in the play to Saddle Barnett Resources (NGW Aug.6'12). Last week only two gas rigs were actively drilling in the Barnett. The Devon sale's price point of $1.29 per flowing thousand cubic feet equivalent might seem low, said Neal Dingmann at SunTrust Robinson Humphrey, but "we believe that any price above $500 million should be viewed as positive." Indeed, the price came in between wide-ranging analyst expectations, highlighting the ongoing valuation uncertainty in the gas space. On the low end, Credit Suisse estimated $650 million for the assets, but Simmons had pegged the value closer to $1 billion-$1.2 billion. Despite its distance from the Simmons estimate, the price is largely in line with recent US onshore gas transactions and the deterioration of the forward gas curve over the past six months, said Simmons analyst Ryan Todd. Analysts viewed the transaction as positive for Devon's 2020 free cash flow and ability to return cash to shareholders. The company's free cash-flow yield is up, now estimated at 3%-4%. But Todd said the company is underappreciated by the capital market and will probably trade at a 20% discount to peers in next year. Tom Haywood and Deon Daugherty, Houston

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