Sometimes even prominent companies can have a hard time turning profits from a seemly can’t-miss situation. In this case, we’re talking about international energy giant Royal Dutch Shell (RDS.A) and the prolific Eagle Ford Shale.
The Eagle Ford has been a source of abundant crude oil and natural gas liquids for countless operators — both big and small — and single-handedly changed the economic fortunes of South Texas and the United States. And yet, it seems that Shell couldn’t find its mojo in the region. Now, the integrated giant is pulling out of the field via a massive asset sale.
Believe it or not, Shell’s decision to sell out could actually be a good thing. As we’ve noted here on InvestorPlace before, being smaller and more nimble could lead to larger profits down the road. For investors, it may be time to revisit the integrated giant.
$2 Billion Write-Down
Despite having more than 106,000 acres to work with and nearly operating 192 wells in the region, Shell just couldn’t seem to get the Eagle Ford to work for its needs. Citing size and scalability issues, the company has decided to put the holdings up for sale.
Wells in the Eagle Ford produce approximately 32,000 barrels of oil equivalent per day. Shell will continue to operate around 150 production wells in region while allowing potential buyers to review technical data on the holdings. Additionally, the firm also said it plans to sell 600,000 acres at the Mississippi Lime formation in Kansas.
The asset sales come on the back of a huge $2.2 billion write-down on the value of its North American assets as well as a 60% drop in profits back in August.
It seems that Shell was late to the shale party, having purchased these Eagle Ford assets back in 2010 — just when the market was peaking. Since that time, the glut of natural gas took much of the wind out of Shell’s production, and causing profits to fall.
Following the lead of other “latecomer” producers — like BG Group (BRGYY) and BHP Billiton (BHP) — Shell took impairment charges against the value of their U.S. shale assets. Essentially, the oil leviathan overpaid for lower quality assets in the region, and that’s not the first misstep Shell has had recently.
But the company has realized its mistakes and has begun the process of getting “smaller.”