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Shale Gas Companies Rising As Shell Is Latest To Pump In Cash
Last update: 5/28/2010 12:44:38 PM


NEW YORK (Dow Jones)--As Royal Dutch Shell PLC (RDSA, RDSA.LN) agreed to pay almost $5 billion for a piece of the piping-hot shale gas formations in the U.S., shares of the companies heavily invested in shales climbed Friday on hopes of more spending sprees.

Shell's planned $4.7 billion purchase of privately held East Resources, along with other resources, is the latest move by an oil major to get into the giant Marcellus Shale, which stretches from West Virginia to New York. That deal overshadowed another acquisition in the same field Friday, with Penn Virginia Corp. (PVA) spending a much smaller $19.5 million to buy more acreage. East Resources is one of the bigger players in the shale, with control of 1.05 million net acres.

Shale formations, natural-gas-bearing rock formations, have become the jewel of U.S. energy resources as the technology to get the gas out has suddenly made it easier and cheaper, leading to rapid consolidation.

The deals provided a lift to those most heavily invested in U.S. shales, particularly Chesapeake Energy Corp. (CHK), Cabot Oil & Gas Corp. (COG), Petrohawk Energy Corp. (HK) and Rosetta Resources Inc. (ROSE), which all gained despite the lower market. Chesapeake rose 1.4% to $22.52, while Cabot added 0.5% to $34.99, Petrohawk gained 2% to $19.48 and Rosetta Resources was up 0.6% to $22.46.

Tudor Pickering analysts said in a note that the Shell purchase was another indication that "big guys" like the shale gas plays and remain willing to pay high prices to get them. The analysts said Shell spent about $7,200 per acre for the Marcellus shale, slightly below the year's $8,200 average. But Shell also announced it bought acreage in Eagle Ford Shale, another hot spot, for closer to $10,000 an acre, the analysts said, above average prices.

"We don't have to ask--do you believe that shale reserves will produce as expected," the analysts wrote. "They're spending [$5 billion] on [the] assumption that shale is for real (another "in your face" for shale reserve skeptics)."

Last December, Exxon Mobil Corp. (XOM) spent $30 billion to buy XTO Energy Inc., while India's Reliance Industries Ltd. (500325.BY) has spent $1.7 billion for a stake in the shale and Japan's Mitsui & Co. (MITSY) paid $1.4 billion this year.
Standard & Poor's equity analyst Michael Kay said Shell's purchase price was "right in line" with other purchases and that consolidation is getting started. He said there are a lot of companies, particularly mid-stream ones struggling with cash, that are available for buying.

Among the other players in the Marcellus shale that were rising Friday were Carrizo Oil & Gas Inc. (CRZO), up 1.6% to $18.25; EQT Corp. (EQT), up 1.1% to $39.31; Rex Energy Corp. (REXX), up 3.2% to $10.69; Range Resources Corp. (RRC), up 1.6% to $45.68; and Southwestern Energy Co. (SWN), up 1.6% to $38.06.

Also, while shale extraction hasn't been without its own controversies, the ongoing disaster in the Gulf of Mexico is making onshore energy sources more attractive at this very moment, which could drive even more consolidation down the line.
Weeden & Co. analyst Ellen Hannan, however, was quick to point out that anyone buying shale assets now had specific motives in mind that wouldn't have anything to do with the Gulf disaster.
Onshore companies have also been building up oil resources, with Chesapeake saying it believes the Eagle Ford Shale is a key area for oil. That move is largely an attempt by the natural-gas companies to combat falling natural-gas prices but could also add to their attractiveness down the line.

"People might start concentrating more on the U.S. onshore," Kay said. "I'm not necessarily bullish on gas prices...but I still really do like the long-term natural gas picture."