I was shocked last week when I saw BHP Billiton spend $15 billion to buy shale gas player Petrohawk Energy (HK). I mean it is one thing for a simple investor like me to be fooled by this shale gas scam and buy a few shares of Chesapeake Energy. It is another thing entirely for BHP Billiton to fall victim to the same scam and spend $15 billion. I mean for goodness' sake don’t they have anyone on staff who is able to read the New York Times?
I’m joking of course. This isn’t even BHP Billiton’s first major shale gas investment. They had previously spent $5 billion buying shale gas assets in the Fayetteville area from Chesapeake Energy.
And while this purchase by BHP is for big dollars, it doesn’t even come close to matching the $41 billion Exxon (XOM) spent to buy shale gas producer XTO Energy back in 2009.
It is funny how a conclusion can seem like common sense to one person, while the next person can see the same information and conclude something totally different. To me, the idea that shale gas is some sort of a Ponzi scheme is just silly. How can anyone really think that Exxon and BHP, who obviously have world class personnel with expert experience, training and access to data have made these sorts of financial commitments without being certain of what these shale resources are capable of?
And of course if for some reason you think Exxon and BHP do not have the expertise, how then do you explain Statoil, CNOOC, Total, PXP, Shell, Sasol, Reliance, BP, Mitsubishi, Petrochina and Chevron all spending billions to lock up shale gas properties as well?
Every one of those companies have done due diligence, have trained people and decided to invest billions in shale gas. What should common sense tell you? That they are all making the same mistake and that shale gas is all hype? Or that when the people with the best training and best data all reach the same conclusion that results in the confidence to spend billions that maybe shale gas does measure up?
I obviously think the correct conclusion is obvious. It isn’t like shale gas production is brand new at this point. We have production data dating back to the early days of the Barnett shale and companies like Chesapeake keep hitting and exceeding their production guidance. The production isn’t falling off the cliff. In fact it is far too successful as there is a glut of the product that is keeping a lid on prices.
The tens and tens of billions of dollars that Exxon, BHP and others have spent doesn’t just make me think that shale gas is for real. It also makes me think that we truly have run out of places to find conventional oil. Why would Exxon spend $40 billion to secure natural gas resources if they could use that money to secure additional oil resources which is much more valuable. Why not spend their capital on the high return commodity?
Interestingly what we are seeing now in the industry is that like in the unconventional natural gas revolution which was driven by independent companies like Chesapeake and EOG the move to unconventional oil and liquids resource plays is again being driven by the non-majors. Chesapeake and EOG are again leading the way in the States with companies like Crescent Point and Petrobakken doing the same in Canada.
And while I believe in the future of shale gas production I’m not interested in investing in shale gas producers. I have no idea when or if the price of natural gas will rebound. The reality is that shale gas has been far too successful for the companies that are producing it as they have killed the price for their product with the resulting increase in supply. Over time we will likely see other smaller players like Petrohawk get eaten by the big fish who can wait 10 years for a rebound in prices or a change in demand levels due to a move to LNG transportation.