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Shell Gains Acquisition Firepower as Cash Flow Cuts Debt

By Eduard Gismatullin on August 07, 2012

Royal Dutch Shell Plc (RDSA) is building the firepower to make acquisitions as record cash flow cuts debt to the lowest level in three years.

Europe’s largest oil producer generated $12.6 billion in free cash flow, the difference between revenue from operations and capital expenditure, during the first half. That’s the most for any six-month period since Shell became a single entity in 2005 and has allowed The Hague-based company to cut its ratio of net debt to equity to 8.8 percent, below any European rival.

Chief Executive Officer Peter Voser has signaled he’s on the hunt for purchases, noting Shell sold $6 billion more in assets that it bought over the past 18 months. Shell’s balance- sheet strength may embolden the company to go beyond the $5 billion peak it’s spent on an acquisition, becoming more like rivals such as Exxon Mobil Corp. (XOM) (XOM), which spent $35 billion buying XTO Energy Inc. in 2010.

“They’ve got a strong balance sheet, which gives them financial flexibility to pursue opportunities,” said Peter Hutton, an RBC Capital Markets analyst in London.

Shell has talked to Anadarko Petroleum Corp. (APC) (APC) about buying some or all of its stake in Mozambique’s offshore natural-gas discoveries, which would build on Shell’s position as the world’s biggest shipper of liquefied natural gas. The holding is valued at about $8 billion, based on the proposed acquisition of one of Anadarko’s partners.

“There are acquisitions opportunities in and around to supply their core strategy of LNG into Asia,” Hutton said.

Julia Dudley, a London-based spokeswoman at Shell, declined to comment on the company’s acquisition strategy.

Qatar Plant

Shell has completed projects including the world’s biggest plant to turn gas into liquid fuel in Qatar and an oil-sands project in Canada that are now generating cash. It will look to buy companies or assets with a value of as much as $10 billion, said Jason Gammel, an oil analyst at Macquarie Bank Ltd.

“There is certainly talk about acquisitions playing role in the portfolio,” London-based Gammel said. “You will see acquisitions being made in the mid-single digit billions.”

Shell bid $1.8 billion in April to buy Cove Energy Plc (COV), a U.K. explorer with assets in Mozambique, before dropping the deal because Thailand’s state oil company tabled a higher offer.

“Acquisitions need to compete with organic projects on a profitability basis,” Voser said at a briefing to announce second-quarter results on July 26. “Cove is a recent example of capital discipline.”

Shell rose 0.6 percent to 2,262 pence in London trading at 9:53 a.m. local time. It’s the eighth day of gains since the company reported the earnings.

Shale Driller

Shell’s biggest purchases in recent years have been in North America, where natural-gas prices at the lowest in almost 10 years are forcing some companies to sell fields. Chesapeake Energy Corp. (CHK) (CHK), the second-largest U.S. gas producer, plans to sell $20 billion of assets to keep commitments to lenders.

Shell may buy companies of a similar size to the U.S. shale driller East Resources Inc. it took over for $4.7 billion in 2010 and Canada’s Duvernay Oil Corp., a gas producer bought for $5.8 billion in 2008, analysts said. Shell sold about $12 billion in assets and made about $6 billion in acquisitions in 18 months to July, according to a presentation by executives.

The company held about $17.3 billion in cash at the end of June, and net debt stood at $15.7 billion, the lowest since 2008. Shell has spent about $1 billion this year on exploration licenses, said Chief Financial Officer Simon Henry.

East Africa

Shell has started talks with Anadarko over buying some or all of its 37.5 percent holding in Mozambique’s Rovuma-1 licence, people with knowledge of the matter said last month. The country is home to the biggest gas discoveries in a decade worldwide. Anadarko may sell some of its acreage off Mozambique, Frank Patterson, a vice president for international exploration, said in June.

“East Africa is obviously a new gas province, which is coming up fast,” Voser said in a Bloomberg Television interview last month. “We are watching the situation very carefully” and “this is a province which is of interest.”

Shell’s long-term debt to equity ratio, or gearing, was 8.1 percent at the end of June, down from 10 percent at the end of March, Henry said. It’s “continuing to move lower in the zero to 30 percent range,” he said. Shell plans to invest $32 billion in projects this year.

Shell has already met its full-year target of disposing $4 billion in assets, Henry said. It sold a refinery in Germany, fuel retail chains in Africa and some fields in Nigeria and Brazil. It will continue to spin off businesses that don’t meet its rate of return hurdle.

A member of joint ventures supplying 30 percent of global LNG, Shell will produce more natural gas than crude oil this year. It plans to invest about $50 billion in Australian LNG projects and developing gas projects in North America, using a 10-year low in local prices to supply the fuel to Asia.

“Every project is very expensive at Shell,” said Christine Tiscareno, an equity analyst at Standard & Poor’s in London. “If they buy something it will be a small company, something very fit to swallow.”

To contact the reporter on this story: Eduard Gismatullin in London at [email protected]

To contact the editor responsible for this story: Will Kennedy at [email protected]


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