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Equinor sounds Eagle Ford alarm bell

The Norwegian firm’s exit is another signal that US shale may no longer be the promised land

Norway’s Equinor increased its stake in its Eagle Ford US shale play by 13 percentage points as recently as 2015, increasing its bet on the play’s success. Its November decision to sell its stake to Spain’s Repsol, its joint venture partner, is a further signal of the challenges in making US shale work.

Then known as Statoil, the firm entered the Eagle Ford in 2010 through a joint acquisition with Canada’s Talisman Energy, which was subsequently taken over by Repsol. Having upped its stake to 63pc in 2015, Equinor announced in early November that it would sell its operatorship and all of its 69,000 net acres to its partner for $325mn. Repsol will gain 34,000bl/d oe of Eagle Ford production, bringing its total output from the asset to 54,000bl/d oe.

“Although production growth has been healthy, we know that Equinor (and partner Repsol) have experienced challenges, amongst others negative interference from wells,” Norwegian investment bank SpareBank 1 Markets said in a note. Liquids production from the asset mainly consists of natural gas liquids (NGLs) rather than crude.

The emerging consensus is that Equinor's entry into Eagle Ford—and shale more broadly—has been a mistake for the company

“Eagle Ford has not been a success for Equinor,” agrees Anne Gjoen, head of equity research for energy at Sweden’s Handelsbanken Capital Markets. “It was known already in March this year that Equinor considered selling it. Equinor has its competitive edge offshore, not onshore,” she says. “In total, its write-down related to shale investments in the US is $9-10bn.

Equinor reported in its third-quarter earnings that its operating income had taken a hit from net impairment charges of $2.79bn, of which $2.24bn related to unconventional onshore assets in North America. The company mainly attributed this to “more cautious” price assumptions.

Equinor has tended not to specify which of its shale assets have resulted in impairments in recent years. But SpareBank 1 says it is “100pc sure” that the impairments relate not only to the company’s Bakken and Marcellus shale assets. “Our wild speculation is that some of the $2.2bn impairment onshore was motivated by reducing Eagle Ford book values to avoid reported an accounting loss on the divestment,” the bank adds.

Taking a hit

In its initial take on the transaction, London financial services firm Pareto Securities identifies an $850mn impairment Equinor had to take on its Eagle Ford assets in 2017, attributed to lower-than expected production and profitability.

Equinor has not disclosed the book value of its Eagle Ford asset, or how much it has invested in the play since buying in. “Therefore, it is hard to make a reasonable assessment of the $325mn deal value, beyond observing that the transaction corresponds to around $6,100 per flowing barrel, which is at the lower end of other shale deals we have seen,” says SpareBank 1. The price of the acreage corresponds to $4,642/net acre, which it says is “materially below” the average of around $14,500/acre paid in other recent deals, according to French bank Societe Generale.

Research firm Carnegie estimates the total acquisition price of the Eagle Ford asset—including the initial 50pc stake and the additional 13pc interest–at c.$1bn. With the assets’ capex and opex costs largely unknown, Carnegie agrees that total book value is difficult to estimate. “But we can easily assume that this has been a very poor and loss-making investment,” the firm says in a note to clients.

Equinor maintains that the US is a core area, although this is partly related to its investments in the Gulf of Mexico and an offshore wind project in New York. But the emerging consensus among analysts is that its entry into the Eagle Ford—and shale more broadly—has been a mistake for the company. Equinor says the transaction supports its strategy of optimising its US portfolio.

“With a troubling history, we believe it is positive that Equinor divests an asset that is relatively high on the cost curve and focus on growing its core business,” says Pareto. Equinor will retain its larger shale assets—Carnegie estimates that the company’s Marcellus assets yield about 200,000bl/d oe while the Bakken accounts for roughly 300,000bl/d oe.

Lower-than-expected Eagle Ford production has been compounded by the high natural gas liquids (NGLs) content. “With NGL production in Texas surging ahead, NGL prices have crashed, making Eagle Ford production less profitable,” says Carnegie. Repsol, whose strategy involves adding scale in core areas– among which it counts North America— is undeterred. “It has said that this deal’s breakeven is >$55/bl oe, but its estimated cost synergies will drive that to $55/bl oe,” says Societe Generale, noting that this is the maximum breakeven price that Repsol has said it will tolerate.

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