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Why Is Shell Divesting Stake In China Lubricants Business

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Published: Dec 12, 2014 at 10:05 am EST

Royal Dutch Shell plc (ADR) (NYSE:RDS.A) has announced plans to sell off stake in the Tongyi oil lubricants joint venture. The company holds a 75% stake in the lubricant firm, while the remaining 25% stake is held by Huo Zhenxiang, the founder of the joint venture. Shell has hired services of China’ investment bank China International Capital Corp to aid in the sale of its 75% stake in Tongyi, which comprises of oil lubricants for motorcycles, cars, and other vehicles.

The investment bank plans to hold the first round of bidding in which major industry players and potential buyers will participate and issue their respective bids. It is expected that foreign buyers will also participate in large numbers to avail the opportunity to buy a majority stake in the joint venture.

The bids that will come in are expected to fall in the range of $350-500 million. The deal will offer buyers a rare majority stake in the company. A US private equity fund The Blackstone Group L.P (NYSE:BX) appears to be on the front line for the first round of bids for the lubricant firm. According to sources, Blackstone in collaboration with Huo Zhenxiang is all set to issue a joint bid for the Tongyi joint venture.

In September 2006, Shell bought the 75% stake in Tongyi. However the firm’s strategy back then was of expansion, in contrast to its strategy now. The fall in crude oil price has significantly reduced the profitability of companies involved in the upstream exploration and production activities. Now, companies aim to sell off their assets and focus primarily on their core business areas.

BP plc (ADR) (NYSE:BP), for instance, was involved in asset divestitures valued at $44 billion as part of its 18-month efficiency strategy of cutting costs. The company is also undertaking a $1 billion restructuring program and is all set to cut-back on thousands of jobs. Similarly, Shell aims to divest the local lubricant business and focus mainly on its core business area.

Shell CEO Ben van Beurden in January had indicated plans to undertake asset divestitures worth $15 billion by the end of 2015. Shell has recently undertaken asset divestitures worth $1.5 billion in Nigeria over theft concerns, and has sold 50% stake in the Haynesville Shale, a gas field in Louisiana, to Blackstone.

Such asset divestitures are necessary given the current low-price environment to ensure that the companies have enough cash to payout dividends and sustain shareholder confidence. Shell currently has the largest lubricant business in China and despite the sale will continue to have significant operations in the country. For conventional vehicles, Shell has its Shell Helix brand and for diesel vehicles the company has its Shell Rimula brand in China. Furthermore, the company has investments in natural gas exploration projects like Nanhai Petrochemicals Complex, and over 1,000 retail fuel stations.

Shell stock has fallen 5% year-to-date. During pre-market hours, the stock was trading at $63.68, down 0.42%.

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