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Shell ‘must look to Africa’ after walking away from battle for Cove Energy

SUNDAY 22 July 2012

Peter Voser: chief under pressure

Published on Sunday 22 July 2012 00:00

SHELL needs to make an acquisition in east Africa to reduce its reliance on Australian gas after walking away from the takeover battle for Cove Energy, analysts have warned.

East Africa is set to become one of the world’s largest gas exporters, supplying energy-hungry Asia with liquefied natural gas (LNG), a market in which Shell is one of the most experienced players.

Shell already has direct stakes in six LNG projects in Australia and indirect involvement in a seventh.

But gas discoveries by Anadarko and Eni in Mozambique – which could be cheaper to develop than those in Australia – raise “questions over risk and returns”, analysts said.

Shell, which is due to publish its half-year results on Thursday, last week refused to increase its 220p-a-share bid for London-listed Cove, valuing it at £1.1bn, leaving Thai rival PTT to buy Cove which holds stakes in huge east African gas finds.

PTT topped the offer with a 240p bid but investors had anticipated a higher offer from one or both bidders, prompting hedge funds to buy in to Cove stock.

Peter Hutton, an analyst at RBC Capital Markets, said: “The bid for Cove Energy highlighted the potential need to rotate exposure from Australian LNG projects to the new east Africa frontier. We believe Shell was right to withdraw, but the shift in portfolio still needs to be addressed.”

Hutton said the growing LNG sector in Africa could be either a threat or an opportunity for Shell, depending on the price it has to pay to get into the market.

City analysts have also highlighted the large amount of cash – some $4bn (£2.5bn) – Shell has already spent on its licence and preparations for drilling in the Beaufort and Chukchi seas off Alaska.

Last week, environmental campaigners mounted protests in Edinburgh and London to Shell’s drilling plans in the Arctic. Protesters dressed as polar bears were led away from a filling station in Edinburgh.

“The drilling window is extremely tight – in the Canadian waters of the Beaufort Sea, the open water season is as little as eight weeks,” said ­Hutton.

He highlighted comments made by US rival Exxon that “a well in the Beaufort Sea could be the most expensive well ever drilled” because it takes two or three seasons in the Arctic to complete what can be done in a single season in more hospitable waters.

Shell chief executive Peter Voser is also expected to come under pressure this week from shareholders, who want higher returns on their investments.

Tony Shepard, an analyst at Charles Stanley, said: “At an $80 a barrel oil price, Shell can fund its capital investment programme and grow the dividend. At the time of the first-quarter results, the 2.3 per cent dividend increase disappointed. If second-quarter cash flow remains strong, calls for a higher dividend may persist.”

Shepard has pencilled in quarterly profits of $6.6bn, flat compared to last year.

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