Petroleum News: Shell Canada in whirlwind

Vol. 12, No. 7  Week of February 18, 2007
By Gary Park

Haggling persists over parent takeover bid; sands partner explores options

Normally a low-key operator in the Canadian oil patch, Shell Canada finds itself being tugged in all directions these days.

Caught in an increasingly turbulent takeover bid by its parent Royal Dutch Shell, the Canadian unit is now faced with confirmation that one of its oil sands partners, Western Oil Sands, is on the prowl for a buyer, merger deal or acquisition.

There had already been speculation that if Royal Dutch acquired the 22 percent of Shell Canada it doesn’t already own it would immediately turn its attention to Western.

Currently a 20 percent partner in Shell Canada’s 155,000 barrel-per-day Athabasca oil sands project, Western has first right of refusal to retain a 20 percent stake as Shell Canada moves ahead with plans to produce 770,000 bpd from the oil sands.

So far it has committed to participate with Shell, the 60 percent operator, and Chevron Canada, also 20 percent, to spend C$12.8 billion to raise Athabasca’s output to 255,000 bpd.

It is also a 20 percent partner in the Chevron-operated Ells River thermal-recovery project and will spend C$35 million this year on evaluation drilling of that property.

In addition, through its wholly owned subsidiary WesternZagros, Western has set a C$20 million budget for this year to follow up an E&P sharing agreement with the Kurdistan regional government in Iraq — a high-risk venture that startled and angered many investors who did not want Western to stray outside its oil sands role.

Western hired special advisors last year

Western hired TD Securities and Goldman Sachs last year as special advisors, but disclosed Feb. 9 that it is seeking new ways to “maximize value” through partnerships or possible outright sale.

The options could include deals to upgrade and refine its oil sands production, currently about 30,000 bpd.

With total minable resources of 1.5 billion barrels, it has some guide to the worth of those assets from an independent valuation of Shell Canada by CIBC World Markets., whose findings were contained in a takeover bid circular issued Feb. 8.

Hired by Shell Canada directors to assess the Royal Dutch bid, CIBC attached a price tag to the Canadian subsidiary of C$42 to C$48 per share.

A committee of directors opted for C$45 — C$5 better than the original offer — because it was at the midpoint of CIBC’s estimate of fair market value and was 37.2 percent above the trading price before Royal Dutch put an offer of C$40 a share on the table.

Several minority shareholders scorned that bid and were still not happy when the bid was hiked by 12.5 percent. They are holding out for at least C$50.

But Royal Dutch Chief Executive Officer Jeroen van der Veer said that if “we don’t get enough people who are prepared to take this full and fair-valued offer, then we move on. We have plenty of investment opportunities.”

He said the company, which has been reeling from a decline in reserves, is rejuvenating its portfolio through new, long-life projects that can produce solid cash flow for decades to come — the sort of assets Shell Canada has accumulated through its oil sands holdings.

“Our upstream investment is driven by a combination of exploration, LNG and unconventionals,” van der Veer said.

Offer open until March 16

The offer remains open until March 16 and requires the support of 50 percent of the minority investors.

A circular showed Shell Canada’s directors took a hard line against Royal Dutch, rejecting revised offers of C$43.50, C$44.50 and C$44.75 before telling Royal Dutch that C$45 would work.

There is still a view among some of the minority shareholders that they would be happy to hold their Shell Canada shares for many more years and reap the benefits.

“We think we can make a lot of money with this company longer term,” said Len Racioppo, president of Jarislowsky Fraser, which controls 29.5 million shares.

Jarislowsky, I.G. Investment Management and Bissett Investment Management, which control at least 20 percent of the minority shares, say they will not tender for anything less than C$50 and believe they could have enough support to derail the deal.

Andrew Potter, an analyst with UBS Investment Research, said the Shell Canada evaluation, although it did not put a separate number on Athabasca, implied there could be a 20 to 30 percent gain in Western shares.

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