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Globe and Mail (Canada): Oil patch expects richer Shell offer: “The deal is logical, expected, and widely rumoured”:

Tuesday 3 January 2006
By ANDREW WILLIS AND PATRICK BRETHOUR
Monday, January 2, 2006
From Tuesday's Globe and Mail
Royal Dutch Shell PLC will have to pitch a sweet offer to shareholders in its Canadian subsidiary if the company does launch a rumoured $7.6-billion-plus buyout of Shell Canada Ltd.
Shares in Shell Canada surged nearly 10 per cent Friday on reports that its parent, based in The Hague, is contemplating a buyout of minority shareholders, who own 22 per cent of the Canadian company.
“The deal is logical, expected, and widely rumoured,” said one top oil patch financier, who added that his investment bank is not advising either company. But he cautioned: “We would expect that unless [the parent company] steps up, the minority will kick and scream, so as much as it is logical, I'm not sure it's doable” because a deal may become too expensive.
A Shell Canada takeover would come as analysts forecast a massive jump this year in the company's cash flow. CIBC World Markets analyst Rob Plexman predicts the Calgary-based company, which holds a stake in the Alberta oil sands, will generate $7.97 of cash a share in 2006, compared with $4.27 in 2005.
A Royal Dutch buyout of its Canadian subsidiary would be in line with the preference of major energy players to buy reserves rather than spend their extra billions from high commodity prices on risky exploration efforts.
Many companies are shying away from committing capital to projects that could turn into money losers if crude and natural gas prices tumble significantly.
Royal Dutch did boost its capital spending plans by $4-billion (U.S.) this year to $19-billion. But the price it uses to gauge the economics of projects remains at $25 a barrel, less than half the level at which crude is now selling.
At the same time, the company has spent massive amounts to repurchase stock. Over the past year, Royal Dutch spent $5-billion buying back its own shares or those of subsidiaries — and has said it will continue that strategy in 2006.
Many foreign companies set up publicly traded Canadian subsidiaries several decades ago when nationalist sentiment ran strong. Most of these minority stakes have been bought back in recent years, and several sources report that Royal Dutch Shell is looking at joining the trend.
Foreign parents that have taken subsidiaries private include E.I. du Pont de Nemours & Co., Campbell Soup Co. and Ford Motor Co. In each case, minority shareholders pushed hard to get top dollar, often forcing the parent companies to improve their opening bids.
No outside investor owns more than 2 per cent of Shell Canada, according to data compiled by Bloomberg News. Several major mutual fund companies each hold about 1 per cent of the company.
Royal Dutch Shell sports a $205-billion market capitalization, so it could certainly afford to buy out its Canadian offspring. The question is whether the purchase would take place at a price that makes sense for the parent.
The European company is reviewing other options for its Canadian operations, according to sources in the financial sector, including additional capital investment and external acquisitions. Shell Canada's crown jewel is its 60-per-cent stake in the Athabasca Oil Sands Project. The Dow Jones wire service quoted one Shell executive as saying that some of the company's senior managers favour a minority buyout in Canada. The executive was quoted as saying further simplifying Shell's structure could help the parent boost profits.
In Europe, Shell has been through a restructuring that saw the merger of Shell Transport and Trading and Royal Dutch Petroleum, the two companies that formed the Royal Dutch Shell group since 1907.
One source said “with the new structure, it's more feasible to make a share exchange” between the Canadian and European companies.

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