In my opinion, too much emphasis has been placed on the alleged strength of public opposition to shale as rationale for not investing. The entrance of Centrica is ironic, given their past statements on shale, but the fact they changed their mind is the key point today. With an eventual commitment of £160 million, the value of the entire company is over $1 billion.
Some, I’m among them, may say Centrica are getting a great bargain, but $1BN is nevertheless a great price for what is still a prospective play. Centrica have essentially anted up, and put a value on European shale assets. Because the M+A between the minnows of European shale gas has been so limited, assessing value has been problematic. Someone serious, putting serious money on the table, is going to bring other players into the game. Centrica’s investment puts down a marker, or benchmark, as to what other assets might be worth.
I’ve always pointed out how the US experience can’t provide either a secret sauce recipe or a direct analogue for European shale, but as it’s the only analogue we have, here goes:
Cuadrilla’s license area is 1200 sq Km, which assigns a value of over $3300 for each acre of the area. Horizontal drilling is playing havoc with the idea of net acreage, i.e. the area that can actually be drilled. Under conventional US models large parts of any license area won’t be drilled for example as they would be parks, nature conservancies, military areas, airports etc, but with horizontal drilling, under those areas become as accessible to the well bore as anywhere on top of it. Valuation by acreage is essentially the only one investors seem to feel comfortable with.
Let’s recall that in the early days of US shale, licenses were selling for as low as $100 an acre, but this shows the range today. From the Sydney Morning Herald earlier this year,
While shale assets in Texas sold at $US25,000 an acre this year and a holding in Ohio and Pennsylvania changed hands at about $US15,000 last month, shale properties owned by Australia's Beach Energy can be bought for $US406 per acre, according to data compiled by Bloomberg and DNB Markets.
These figures show the upside potential for Centrica. Centrica have to be cautious, and can afford to be if things don’t pan out, but I think it could be a company maker. We’re several years away from that stage, but Centrica may well sell the field off for billions at a future point, while being at worst £160 million exposed. So, who will be the heroes –and the zeroes – in UK shale gas? Firstly, almost anyone who has a license and is traded publicly has seen prices jump noticeably this week. The more obvious winners are those who simply are in the right place at the right time, and hold the key oil and gas metric of “nearosity”, i.e. being in the neighbourhood and effectively getting a free ride from Cuadrilla’s work.
But the Bowland isn’t the only prospect in the UK, and there are vast swathes of currently unlicensed areas coming up for exploration licenses next year. Everyone in the UK holds a small piece of that action via the Treasury take, and I hope that the license round will be scored next time on who can get the gas, oil and money flowing into the public purse as soon as possible. It seems sometimes that 95% of UK shale companies have squandered the public interest by being in no rush to development, but they can blame investors for most of that. In turn, much of that blame also resides with the dismissive attitude of former Energy Minister Charles Hendry who seemed in far more of a hurry to spend government resources on renewables than to collect resources for education, health, the armed forces –and yes energy technology R+D - via shale extraction.
It’s becoming clear that that at the national and EU level, governments are fully supportive at the top. Hopefully we won’t see another Polish situation, where executive enthusiasm doesn’t reach the local level, one where local bureaucrats think of ever more labour intensive ways of not doing something than actual actions. The rest of the world, as the EIA showed last week, has shale a plenty. Europe has two choices: to access their own, or buy someone else’s, but shale is the future and the sooner the local planning committees are sent memo after memo after memo from central government, the better. At the same time, the magical solutions of the conventional green catastrophists need to be discussed in an atmosphere not of blind faith but open eyed science.
Going back to investment, Cuadrilla shows the way for shale in Europe as well. It’s a great time for investment in European shale, and almost all companies deserve far greater valuations than they are assigned today. But I’m not in the stock advice business – at least not to small investors.