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Chevron may struggle to find buyers for Appalachia shale gas assets

Analysts and investors were not surprised by Chevron Corp.'s recent disclosure that it is considering selling its Appalachian natural gas shale assets, but the major may be hard-pressed to find interested buyers since sluggish gas prices are not expected to recover any time soon, according to analysts.

"Is anyone willing to buy [the Appalachian] assets?" will be the key question for Chevron moving forward, Raymond James analyst Muhammed Ghulam said in a Dec. 11 phone interview.

If prospective buyers are found for the assets, they may not be willing to pay top dollar in light of the poor outlook for gas prices, he said.

"We have been calling for low gas prices for several years now," Ghulam said, indicating that benchmark Henry Hub gas prices should range between $2/MMBtu and $3/MMBtu for the foreseeable future.

Citing its own downward revision to the longer-term commodity price outlook, Chevron said Dec. 10 that it expects to take as much as an $11-billion impairment charge in the fourth quarter, with more than half of the write-down driven by its Appalachia gas shale assets. The write-down also includes the Kitimat LNG project in Canada, the Big Foot offshore oil project in the Gulf of Mexico and other unnamed gas projects around the world.

Chevron's announcement amounts to a total write-off of its November 2010 takeover of Marcellus and Utica shale producer Atlas Energy Co. Inc. for what would become $5.4 billion in cash and debt at closing. The Atlas deal gave Chevron more than 1 million acres of leasehold in southwest Appalachia with 850 Bcf of proved reserves at the tail end of the shale gas land rush.

When that deal was cut more than nine years ago, natural gas traded between $4/MMBtu and $5/MMBtu at Henry Hub, with local hubs such as Dominion North and South seeing similar prices, according to S&P Global Market Intelligence data. Those prices have crumbled with the Henry Hub on track to trade at a 2019 average of around $2.60/MMBtu, a level not seen since 1999. The Dominion hubs in southwest Pennsylvania averaged just above $2/MMBtu in November with a winter futures price near $1.80/MMBtu, according to S&P Global Market Intelligence.

Chevron's decision is a reflection of those weak prices, oil and gas consulting firm Wood Mackenzie Senior Vice President Tom Ellacott said in a Dec. 11 statement. Wood Mackenzie expects more price-related write-downs of shale gas assets, purchased at premium boom prices a decade ago.

"U.S. shale gas assets have been hardest hit, reflecting the weak outlook for U.S. gas prices," Ellacott said. "We expect the trend of write-downs to continue as price outlooks are adjusted down."

The California-based Chevron also said on Dec. 10 that it is mulling the possible sale of its 50% stake in Kitimat LNG in British Columbia.

"We've long seen investment in the company's Appalachian assets as unattractive, and while we're surprised by the inclusion of Kitimat LNG in this discussion given ongoing permitting of a new, low-emission design, we think investors will welcome stepping away from this project given the oversupplied outlook for LNG and difficulties with executing on such a complex project," according to a Dec. 11 note from Tudor Pickering Holt & Co.

"We continue to favor the company's shift to relatively stable, short cycle capital and view ample resource potential available through M&A at attractive valuations given the continued disparity in integrated share performance vs. E&Ps," Tudor Pickering Holt added.

Chevron's shares on the New York Stock Exchange were down almost 0.8% to $116.97 by midday Dec. 11.