Over the past several months, we have wondered if despite new all time high shale production, whether the US shale sector in the has peaked. Some of our recent thoughts can be found in the following articles:
- Why Some Hedge Funds Believe The Shale Boom Is Coming To An End (Again)
- Shale Efficiency Has Peaked For Now As Rig Count Surges For 22nd Straight Week
- Is The Second Shale Boom Grinding To A Halt?
- Has Permian Productivity Peaked?
- Peak Shale: Anadarko Just Became The First US Oil Producer To Slash CapEx
The "peak shale" narrative got a boost in late July when one of the world's most bearish hedge funds, Horseman Global, announced it was aggressively shorting shale companies on the thesis that funding is about to "run dry", resulting in a sharp drop in production and with the lack of capex, would lead to another round of industry defaults (while sending the price of oil higher).
More evidence was revealed in the latest Baker Hughes data, which showed that both active Horizontal and Permian oil rigs had finally peaked and were now declining, while the number of oil rigs funded by Public junk bond deals had plateaued, suggesting little interest in future funding:
Fast forward to today when overnight, we got the clearest indication yet that the US shale sector may have indeed have peaked, when BHP Billiton - the world's largest miner - said it was in talks with potential buyers of its U.S. shale assets, purchased during a frenzied $20 billion buying spree in 2011, just as the price of oil peaked.
“We’re talking to many parties and we’re hopeful” of completing a small number of trade sales to divest the onshore oil and gas division, Chief Executive Officer Andrew Mackenzie told Bloomberg Television Tuesday in an interview, adding that the moves on shale and potash aren’t the result of shareholder pressure. “We have been moving in this direction for some time” on shale.
As Bloomberg adds, BHP's strategic pull-back by comes after new Chairman Ken MacKenzie, who starts his job next month, met more than a hundred investors in recent weeks in Australia, the U.S. and the U.K. in the wake of the campaign by some shareholders calling for reform.
BHP's admission that there is no more upside for its shale assets, in their current form, is a victory for Elliott Singer's ongoing activist campaign, which has been pushing for a disposition of these assets in a vocal activist campaign. According to Singer's Elliott Management, strategic missteps by BHP’s leadership, including in the shale unit, have destroyed $40 billion in value; Elliott launched its public campaign seeking a range of reforms in April.
Admitting that Elliott is right, during a call with analysts, CEO Mackenzie said BHP’s 2011 shale deals had been too costly, poorly timed and the eighth-largest producer in U.S. shale didn’t deliver the expected returns. That said, if the company expected oil prices to rebound, or if the shale assets to become sufficient productive where they would generate positive returns, he would hardly have sold them. Which is why in the current configuration of prices and technology, at least one major player in the space has confirmed that shale's euphoric days may be over.
This was confirmed by Macquarie Wealth Management Division Director Martin Lakos who said that BHP likely concluded the shale and Jansen assets were “not going to generate the returns that is going to make the grade,” although he added that “it’s most likely the Elliott activity has accelerated the shale sales process.”
BHP's disposition of shale has been a long time coming:
Discussions among BHP shareholders have been dominated by concerns over shale and potash, according to Craig Evans, a portfolio manager at Tribeca Investments Partners Pty, which holds the producer’s shares. Tribeca and other investors have also pressed the case with BHP directly, he said.
“Elliott put the first balls in motion on this in calling them to task,” Evans said. “It’s no coincidence that we’re talking about those issues now.”
Investors including AMP Capital, Schroders Plc, Escala Partners and Sydney-based Tribeca have added to criticism of BHP, or offered support for some of Elliott’s proposals, in recent weeks. Elliott didn’t immediately respond to a request for comment on BHP’s decisions on shale and potash
Some believe that BHP timed its asset sale at just the right time: "BHP are going to get better value than they would have two years ago after the surge in crude oil price from last year’s 12-year low," David Lennox, an analyst at Fat Prophets, said on Bloomberg TV. The company has “probably picked an opportune time because we’ve seen the oil price come up from a bottom,” he said.
Of course, a much bigger question is whether the potential buyer will agree, as any acquiror will be purchasing not on current or historical prices, but where they expect oil prices to go in the future. As such, the big wildcard is shale's access to cheap funding, which for the past 3 years has been the only factor that mattered not only for the US oil industry, but also for OPEC, whose repeated attempts to push the price of oil higher has been foiled every single time thanks to record low junk debt yields and an investor base that will oversubscribe every single shale offering. Well, as we showed last month, that is now ending as bond investors have suddenly turned quite skittish, and the result is that US shale production has not only peaked but is once again declining. While it remains to be seen how the overall industry will respond, if indeed we have hit "peak shale", OPEC's long awaited moment of redemption may finally be here.
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