Petroleum News: Royal Dutch sweetens Shell Canada bid

Vol. 12, No. 4  Week of January 28, 2007

Company adds another C$1 billion to offer for minority shares; Jan. 23 C$45 per share offer replaces earlier offer of C$40 per share

Gary Park
For Petroleum News

Three months after putting C$7.7 billion on the table, Royal Dutch Shell caved in to mounting pressure by adding another C$1 billion to its bid for the minority shares of Shell Canada, a 12.5 percent increase that falls short of 15 to 20 percent being demanded by some minority shareholders.

The deal is grabbing industry-wide attention as the possible yardstick for an expected flood of consolidations in the Canadian oil and gas sector this year, with special emphasis on the value of oil sands assets.

It occurs as rumors swirl around a possible attempt by France’s Total to acquire Nexen for something in the range of C$20 billion, while Husky Energy and Talisman Energy remain high on many lists of takeover targets.

Eager to rebuild its global reserves, Shell in late October made a cash offer of C$40 a share for the 22 percent of Shell Canada it doesn’t already own.

Since then the subsidiary’s shares have stuck resolutely above C$42, peaking lately at close to C$45 and the investment community has speculated that a new offer would be in the range of C$46-$48 and could push through C$50.

Shell, in submitting its revised offer of C$45, said it intends to proceed through a takeover bid and is conditional on half the outstanding shares being tendered. The deadline for acceptance is Feb. 26.

Company hasn’t satisfied minority investors

From the outset there was a strong view that Shell would fail to win over the minority investors.

When the offer was first announced, Shell Canada Chief Executive Officer Clive Mather said a special committee of his board would take a “number of weeks at minimum” to complete a valuation process.

That independent committee endorsed the higher bid Jan. 23 after advisor CIBC World Markets said the bid was “fair from a financial viewpoint to (minority) shareholders.”

But it appears the latest offer is still not high enough to sway all investors.

While some U.S. investment managers have indicated they are ready to settle for something close to C$45, Calgary-based Bissett Investment Management (with 4.4 million shares) wants better than C$46 and Jarislowsky Fraser (with 29.5 million shares or 17 percent of the minority holding) has told the Shell Canada special committee the sale price should be above C$50. I.G. Investment Management, with 6 million shares, said it will not sell its stake.

There is now talk that some shareholders will bypass the Shell Canada board and take their case directly to the parent company.

Bassett director of equity research Gary Aitkin said C$45 is inadequate for a company that is not struggling or in need of capital. He said there is no reason why the subsidiary’s profitability and growth can’t continue.

Len Recipe, president of Jarislowsky Fraser, said he can never recall a case when a parent company has offered full value for a takeout of minority shareholders. The only way to achieve that value is to hold an auction, he said.

Andrew Potter, an oil and gas analyst at UBS Securities Canada, said the exercise puts the spotlight on the value of the oil sands for players looking to expand their holdings in the region.

He said the C$45 per share offer is a 13 percent premium on Shell Canada’s net asset value, but he is not ruling out a second increase.

Compelling reason for gaining ownership

For Shell there is a compelling reason to gain ownership of Canadian assets that would give a substantial life to its reserves.

The package includes billions of barrels in Alberta’s three oil sands regions (Athabasca, Cold Lake and Peace River), all of them under active development; 11.4 percent of the Mackenzie Gas Project; access to deep gas plays in the Alberta Foothills; 31.3 percent of the Sable gas field offshore Nova Scotia; and, on the distant horizon, a major leaseholding near the Queen Charlotte Islands offshore British Columbia.

Everything suggests the Canadian unit is poised to make a sharp increase in its current 6 percent contribution to Shell’s overall production.

Taking control of Shell Canada would also give the parent company a free hand to fully integrate the oil sands operations into its refining network.

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