Royal Dutch Shell has agreed to sell its stake in US Appalachian shale gas to National Fuel Gas (NFG) for $541m.

The deal covers developments across two fields in Pennsylvania, US. Both companies confirmed the deal late on Monday, expecting to finalise it before the end of July. It will be effective from the start of the year.

NFG will pay for most of the deal in cash, with the option to pay $150m in shares. Using its existing hedges, it expects to see $100m of free cash flow from the fields over the next 12 months.

Understanding what was traded

The traded assets include reserves of approximately 710 billion cubic feet of gas remain. According to Shell, the net production of the area is 250 million cubic feet per day. In the 12 months following the deal, NFG expects 70 billion to 75 billion cubic feet of production.

The deal includes 350 wells across the Marcellus and Utica formations, in the north and west of Pennsylvania. This covers 400,000 acres and lies adjacent to the company’s existing developments. In its announcement, NFG said half of this has “high economic development potential”.

It includes water infrastructure and piping, as well as 142 miles of gathering pipelines and related compression systems. These are linked to the company’s existing Empire pipeline system, and NFG has said it expects to integrate all wells into its existing operations in the area.

The thinking behind the deal

A statement from Shell said the sale was part of its efforts to streamline its shale business. A spokesperson said it intends to focus on “development of higher margin, light tight oil assets”.

Shell upstream director Wael Sawan said: “While we maximize cash in the current environment, our drive for a competitive position in shales continues. It is a core part of our upstream portfolio along with the deep-water and conventional oil and gas businesses.”

In a statement, NFG said the “unique opportunity” builds upon its “diversified, integrated business model”. The new upstream and midstream assets are “highly synergistic” to its existing operations.

With news of the deal, shares in Shell and Natural Fuel Gas Company made large gains when markets opened.

National Fuel Gas operates across Pennsylvania and New York. It owns Seneca Resources company, National Fuel Gas Midstream, and NFG Midstream Covington.