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Shell Sees Recession Improving Acquisition Prospects

Bloomberg

 

By Aaron Clark and Jim Polson

March 3 (Bloomberg) — Royal Dutch Shell Plc, Europe’s biggest oil company, said the recession is creating opportunities to acquire oil and natural-gas assets.

“As other companies potentially — either already have or potentially — go into distress and have an inability to perform on what they have, that likely creates an opportunity,” Marvin Odum, president of The Hague-based Shell’s U.S. operations, said today in an interview in New York.

Shell made at least eight acquisitions last year, including its C$5.27 billion ($4.06 billion) purchase of Canadian natural- gas producer Duvernay Oil Corp. The company is maintaining its highest dividend yield since the merger of its Dutch and U.K. units in 2005, and Odum said Shell is going forward with plans for $31 billion to $32 billion in capital spending this year, even after oil prices plunged more than $100 a barrel.

“They won’t make any major purchases as they have to protect the dividend and finance major projects that are already under way,” said Peter Heijen, an analyst at Theodoor Gilissen Bankiers NV in Amsterdam. Heijen rates Shell stock at “buy.”

Oil and gas production is the eighth-most active industry for mergers and acquisitions by value this year, according to data compiled by Bloomberg. That ranking may rise as international oil companies such as Shell and Exxon Mobil Corp. scoop up projects.

Undervalued Assets

“It makes great sense for companies to consider acquisitions,” said Nansen Saleri, chief executive officer at advisory firm Quantum Reservoir Impact in Houston. “Any hydrocarbon asset, gas or oil, is undervalued.”

Crude-oil futures in New York rose $1.18 to $41.33 on the New York Mercantile Exchange. Prices are still down 72 percent from the record high reached in July. Gas futures also are trading at less than one-third their 2008 high.

Shell and its rivals will seek stakes in massive hydrocarbon projects planned by cash-strapped national oil companies, said Saleri, formerly head of reservoir management at state-owned Saudi Arabian Oil Co.

“Iraq is primed for development and the biggest opening for a long time to come,” Saleri said. “The companies who can bring the best capital deals will be in the best position to strike the best contracts.”

Assets in the former Soviet Union “are very attractive if you have the capital and the knowledge,” he said.

Drilling Plans

Shell’s financial strength gives it an advantage over smaller producers in negotiating supply deals, Odum, 50, said. The company reported $15.2 billion ofcash on hand as of Dec. 31. It isn’t idling U.S. gas wells in response to lower prices, and it’s going forward with drilling plans, he said.

Chesapeake Energy Corp., an Oklahoma oil and gas producer that lost more than half of its market value last year, said yesterday that it idled 7 percent of its output because some wells were made unprofitable by the drop in prices. The company also gave a partner, Plains Exploration & Production Co., an option to reduce its stake in a joint venture to extract gas from the Hayneville Shale formation of northwest Louisiana and eastern Texas.

BP, Europe’s second-largest oil company, bought Arkansas shale assets from Chesapeake for $1.9 billion in September and Oklahoma assets for $1.75 billion in July.

Odum said Shell will probably look for opportunities in “traditional” areas and in “the same businesses we are in now.”

Shell’s Class shares fell 5.4 percent to 1,372 pence in London. The stock has dropped 24 percent this year.

Odum became president of the company’s Shell Oil Co. unit in June 2008.

To contact the reporters on this story: Aaron Clark in New York at[email protected]Jim Polson in New York at[email protected].

Last Updated: March 3, 2009 16:23 EST

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