Shale Plays getting lots of attention

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By Adveith Nair & Krishna N. Das

BANGALORE, July 8 (Reuters) - Private equity firms keen to invest in the energy sector will likely follow global oil majors into North American shale plays, eyeing the premium they can earn by disposing of the assets sooner.

Given the surging prices of shale assets, thanks to foreign companies trying to learn horizontal drilling techniques, PE firms will most likely look to sell the stakes soon after buying them, making a neat profit in the bargain.

In spite of low gas prices, acreage in shale formations that could hold enough natural gas to satisfy U.S. demand for a decade, has become increasingly sought after. The deepwater BP (BP.L) (BP.N) oil spill could further spur that demand.

(For a Factbox on shale deals, click [ID:nLDE64A1DY] )

"PE firms will buy the land in anticipation of a developer coming in and paying a significantly higher price for the same portion of land," Oppenheimer analyst Fadel Gheit said.

Shale formations are lucrative, but expensive to develop. Joint ventures give oil firms access to capital while their foreign counterparts can pick up expertise in drilling methods developed for shales.

To avoid sharing this much-sought-after drilling know-how, the debt-laden and capital-hungry companies holding shale acreage are more likely to sell assets to PE firms who look at the deal as more of a low-risk investment.

"Private equity players want to play in the energy space, but with minimal exploration risk. Shale plays are exactly that," Wunderlich Securities analyst Neal Dingmann said.

"There is lots of PE money on the sidelines looking to get into a deal."

PE major and trendsetter KKR (KKR.AS) recently unveiled plans to invest up to $400 million to develop Hilcorp Energy's Eagle Ford shale property, days after selling its stake in East Resources to Shell (RDSa.L) at a premium. [ID:nN14198045]

KKR's deal with Hilcorp works out to roughly $10,000 an acre while Reliance Industries (RELI.BO) recently forked out over $14,000 an acre for its joint venture with Atlas Energy (ATLS.O). [ID:nSGE63B023]

Shale assets have already brought a windfall for many companies, with some pocketing more than ten times the $700 to $900 per acre they paid a few years ago.

BET ON BAKKEN

The most attractive plays, analysts say are the Bakken, one of the few "oily" shales in continental United States, and the Eagle Ford, given its high liquid content.

"As we start to become more bullish about natural gas prices, the Marcellus and the Haynesville will start to look attractive," Wunderlich's Dingmann said.

Brigham Exploration (BEXP.O) has seen stellar results at its wells in the Bakken region, including some that flowed at over 5000 barrels of oil equivalent per day. [ID:nSGE64P0E6]

Besides Brigham, others with strong shale acreage include Cabot Oil and Gas (COG.N), Range Resources (RRC.N), Whiting Petroleum (WLL.N), Exco Resources (XCO.N) and Rex Energy (REXX.O).

"Whiting and even Brigham are some of the larger companies in the Bakken which might position themselves for a sale or a joint-venture," analyst Dingmann said, adding that each acre could fetch as much as $6000.

While a deal for $6000 an acre would represent a discount to recent deals, it would still be a hefty premium to the initial cost of the acreage.

The sellers, meanwhile, are hardly complaining as such asset sales not only provide them with much needed capital for their exploration programs, but also help them cut debt.

The parade of foreign entrants into the shale plays include Reliance Industries, Total (TOTF.PA), Statoil (STL.OL) and Mitsui (8031.T), with Chinese and Russian oil companies also eyeing entry points.

The rising interest by foreign oil majors are pushing prices higher, questioning the sustainability of the surging valuations.

"These foreign buyers are driving prices to astronomical levels everybody knows are unsustainable," Gheit said.

"The bubble is going to burst." (Reporting by Krishna N. Das and Adveith Nair in Bangalore; Editing by Savio D'Souza and Don Sebastian)