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Lex live: Royal Dutch/Shell

Financial Times: Lex live: Royal Dutch/Shell

6 June 2005

When crude prices are high, acquisitions are tough for an oil company to justify. But as Peter Voser, chief financial officer, reiterated on Monday, after the planned merger of Royal Dutch with Shell, at least the oil major could use its paper as currency for a deal.

Shell emphasises that the ability to issue paper does not mean a significant deal is under consideration. It is committed to organic growth and share buybacks. A transformational deal, which would undermine confidence in this strategy, is unlikely. A merger with another international major would also face significant political and regulatory hurdles.

Pursuit of smaller, second-tier targets appears more likely. The problem remains of what to buy – and Shell’s management does not have a credible acquisition track record. Competition for individual assets is fierce following the arrival of China and India as buyers. Corporate action may be the easier route, but valuation is a problem. Many potential targets, such as oft-mentioned BG Group, are highly rated. With crude at $55 a barrel, even an all-share deal might induce shareholder apoplexy. Hedging the target’s future production to take advantage of the current high level of forward prices could, however, help justify the premium paid to acquire control.

The alternative is for Shell to raise its forecast for long-term oil prices and risk shareholder disapproval. Rising oil prices made Shell’s much-criticised purchase of Enterprise Oil more attractive in hindsight. But paying up for a snack-sized target would do little to alter Shell’s unattractive production profile. Unfortunately, even if it is prepared to pay the price, there is no quick fix for Shell.

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