July 24, 2021

Brand Of "Game Changer Hub Inc"

Royal Dutch Shell: potential Permian sale is only a drill

2021-06-14 14:53:55

Like the enormous tankers that carry their products, big oil companies do not qualify as nimble. Last month, a court at The Hague ordered Royal Dutch Shell to do more to reduce carbon emissions. That does not mean it must act immediately. Reports that Shell plans to sell off its US Permian shale oil assets sound premature.

Prior to the court ruling, Shell delivered an upstream strategy that highlighted nine core oil and gas-producing areas around the globe. These represent 80 per cent of the group’s cash flow from operations. One is the Permian Basin in the US. Putting assets there up for sale after boasting of their importance to the group would send an inconsistent message to shareholders and employees. Moreover, Shell’s legal appeals on the emissions ruling will require several years.

Still, never say never. Every company should consider offers for assets, or indeed the entire enterprise, if the price is right. The Permian accounts for about half of the crude oil produced in the “lower 48” US states excluding Hawaii and Alaska, and 6 per cent of Shell’s output. Profitability there has improved as commodity prices rise, exceeding 10 per cent on invested capital, says Rystad Energy. US oil futures traded over $71 per barrel on Monday, up 47 per cent this year alone. It is understandable if buyers are interested in Shell’s roughly 500,000 total acres there.

Chart showing that Shell has generated relatively little profit in US upstream. Pretax profit, $billIon. Figures for US and the Shell Group, 2017-2020.

Shell has had a mixed experience with its US upstream business but this year could bring a turning point. It has reported losses in US oil and gas production in two of the past four years. At the current average futures curve price of $55 per barrel, it could raise $9bn-10bn and wipe out those losses. Permian wells should produce plenty of free cash flow given they have paid off upfront costs. It would be a shame for Shell to offer these up to neighbouring groups such as Occidental Petroleum or Chevron.

Two charts. First chart showing that Permian is an important oil region. Figures show Permian, US onshore oil production and US total, million barrels per day (May 2020).

Shell’s carbon emission reduction plan must continue. But selling off one of its core upstream areas, unless for a very high price, does not make sense at present.

Our popular newsletter for premium subscribers is published twice-weekly. On Wednesday we analyse a hot topic from a world financial centre. On Friday we dissect the week’s big themes. Please sign up here

Twice weekly newsletter

Energy is the world’s indispensable business and Energy Source is its newsletter. Every Tuesday and Thursday, direct to your inbox, Energy Source brings you essential news, forward-thinking analysis and insider intelligence. Sign up here.

Source link