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Financial Times: Papering the cracks

Financial Times: Papering the cracks

Published: June 7 2005

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

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

Pursuit of smaller, second-tier targets appears more likely. The problem remains of what to buy. Competition for individual assets is fierce following the arrival of China and India as buyers. Corporate action may be an easier route, but Shell does not have a credible acquisition track record and valuation is a problem. Many potential targets are highly rated. Hedging the target’s future production to lock in existing current high forward prices could, however, help justify paying a premium.

Alternatively, Shell could raise its long-term oil price forecast and risk shareholder apoplexy. Rising crude prices made its 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 growth profile. Unfortunately, even if Shell is prepared to pay the price, there is no quick fix.

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