Petroleum News: Shell’s C$7.7 billion bid no slam-dunk

Buying out Canadian assets could force Royal Dutch Shell to dig deeper; parent company wants to align Canadian decision-making

Gary Park
For Petroleum News
Week of October 29, 2006

Royal Dutch Shell, still reeling from its 2004 reserves accounting scandal, is in a hurry to rearrange some of its global operations.

It may be in too much of a hurry.

A year after a complex merger of Shell Transport and Trading and Royal Dutch Petroleum — the two companies that have been the foundation of Royal Dutch Shell for 100 years — it swooped in Oct. 23 with a C$7.7 billion offer for the 22 percent of Shell Canada shares it doesn’t already own.

If it pulls off the deal, it will take complete control of billions of barrels of oil sands deposits in Alberta and remove a decision-making obstacle.

Linda Cook, Shell Canada chief executive officer for 12 months from mid-2003 and Shell’s global executive director, reportedly told other managers last year that she had been stalled by having to deal with the Canadian subsidiary’s 10 directors, seven of whom are independent.

“Under the current structure, Shell Canada develops its own strategy for its own shareholders which may not always be aligned with our global strategy at Royal Dutch Shell,” Jeroen van der Veer, chief executive officer at Shell, told a conference call Oct. 23.

“We see opportunities with a simplified North American organization and this will facilitate both upstream and downstream. In Shell Canada’s positions in the Canadian oil sands, it makes this region a top growth asset in Royal Dutch Shell’s portfolio.”

He said it will take the use of Shell’s downstream assets in the United States (where it owns or has interests in six refineries in the Gulf Coast and California with combined capacity of 1.2 million barrels per day) to fully unlock the oil sands value.

Shell now paying attention to Canadian assets

It is only in recent times that the parent group started paying close attention to the Canadian assets, notably after the significant downsizing of its reserves.

Entering 2006, rumors that Shell was about to buy out the minority shareholders pushed Shell Canada shares to record highs, which persisted through January when they peaked at C$47.19.

Since then they have wilted, sliding back to a 52-week low of C$28.90 in August and struggling to remain above C$30, mirroring the dive in oil and natural gas prices.

In this weakened environment, the parent company made its long-anticipated move, putting an offer of C$40 a share on the table.

The same day 24.4 million shares changed hands — 40 times the average — as shares closed at C$42.55, up 30 percent, in a clear signal that the market expects an improved offer will be tabled.

Shell Canada Chief Executive Officer Clive Mather said a special committee of his board will take a “number of weeks at a minimum” to complete a valuation process.

Shell said only that it won’t proceed unless it has at least 50 percent support from minority shareholders.

Market expects price to rise

Len Racioppo, president of Jarislowsky Fraser, which controls 29.5 million of Shell Canada’s 825.5 million shares, doubted that the initial offer would survive.
He said the parent company was “clearly being opportunistic,” taking advantage of the slump in commodity prices and Shell Canada’s disclosure that the next phase of its oil sands expansion could overshoot estimates by 50 percent.

Garey Aitken, portfolio manager at Bissett Asset Management, which controls 3.7 million Shell Canada shares said the C$40 bid is not sufficient.

“There is a lot of hidden asset value here,” he said.

Glenn MacNeill, vice president investments at Sentry Select Capital, which owns 100,000 shares, is counting on a “little more juice” to reflect the more upbeat view of oil’s future prices.

The word on the street is that anything under C$46 could see the deal collapse and even Shell Chief Financial Officer Peter Voser, while insisting the offer was “full and fair,” conceded the market will determine the price of the deal.

Shell would have foothold in every major play

Bringing the Canadian holdings under one umbrella would give Shell a foothold in every major Canadian play.

It would have access to billions of barrels in Alberta’s three oil sands plays (Athabasca, Cold Lake and Peace River) as well as a leading position in the untested carbonate formations; 11.4 percent of the Mackenzie Gas Project; a key role in the deep gas plays of the Alberta Foothills; and a 31.3 percent stake in the Sable gas project offshore Nova Scotia. Van der Veer said the Canadian unit, which accounts for about 6 percent of group production, will expand that contribution as the oil sands business grows and Shell brings into play its proprietary technology to exploit both the oil sands and oil shales in Colorado.

John Hofmeister, head of Shell’s U.S. unit, said the mining and in-situ technologies developed in Canada and the U.S. have prospects in China, Jordan and other parts of the world, including Colorado, the Peace River region of northwestern Alberta and Venezuela.

He said that given the minority shareholdings in Canada it is not technology that could be shared.

Bringing those elements together holds promise for all of the oil sands, where the Shell Canada-operated Athabasca project produces 155,000 bpd (93,000 bpd net) and hopes to add 100,000 bpd by 2015, although the latest cost estimates point to a possible 50 percent rise to C$12.8 billion.

But that hasn’t deterred the Calgary-based unit from setting its sights on 550,000 bpd from the oil sands by 2020.

In addition to Athabasca, it has ambitious plans for the Peace River area following its C$2.4 billion takeover of BlackRock Ventures, a deal that lays the groundwork for a possible 100,000 bpd operation.

The disappearance of Shell Canada would also remove a muddy situation that arose early this year when Shell E&P in the Americas, operating through newly created subsidiary Sure Northern Energy, surfaced as the surprise buyer of parcels in the limestone deposits where Shell hopes to apply its new enhanced oil recovery technologies.

Sure Northern spent C$590 million acquiring almost 300,000 acres in the Grosmont formation and is now drilling appraisal wells to better evaluate the holdings.

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