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Shell Pulls Out of 19-Year Motiva JV with Saudi Aramco

Zacks Equity Research

Anglo Dutch oil giant Royal Dutch Shell PLC RDS.A and Saudi Arabian Oil Co. or Saudi Aramco recently finalized an agreement to split up their 19-year joint venture (JV) – Motiva Enterprises LLC.  Aramco subsidiary Saudi Refining Inc. and Shell’s affiliate SOPC Holdings East LLC intend to divide the assets and liabilities of their refining JV, Motiva which operates three refineries in the U.S. Gulf Coast. The deal is set for closure in the second quarter of 2017, subject to regulatory approvals.

Terms of the Deal

Per the terms of the deal, Aramco will make a payment of $2.2 billion to Shell. This consideration will be both cash and debt-based. Aramco will assume almost all of Motiva’s $3.2 billion of net debt, which includes Shell’s share of $1.5 billion. The remaining balance will be paid in cash. Shell will assume only $0.1 billion of net debt.

Deal Motive

The termination of this joint venture and redistribution of assets will allow both the companies to concentrate on their downstream operations.

The deal is well aligned with Aramco’s strategy to expand its global refining footprint which will enable it to secure oil markets easily. The move is also in line with Aramco’s global downstream strategy and will likely enhance the company’s core capabilities.

For Shell, this deal takes the company’s $30 billion divestment program a step forward. The agreement provides Shell a major impetus to reduce debt following the acquisition of BG Group for $47 billion. The company had offloaded $5 billion worth stakes last year and is further divesting assets worth $7.2 billion including Motiva split. The move is also in sync with the company’s aim to upgrade and streamline its downstream business portfolio.

Split details

Per the deal, Saudi Refining Inc. will take full control of the Motiva Enterprises legal identity and the 600,000 barrel per day (bpd) Port Arthur refinery in Texas. It will also take over 24 distribution terminals along with the exclusive license to use Shell brand for gasoline and diesel sales in Texas and the other South East and Mid-Atlantic markets.

In exchange, Shell will gain complete ownership of Louisiana Refining System consisting of 235,000 bpd Norco refinery as well as 230,000 bpd Convent refinery. It will also retain 11 distribution terminals along with the Shell branded markets in Florida, Louisiana and the U.S. Northeast.

Zacks Rank and Key Picks

Headquartered in Netherlands, Shell is one of the largest integrated energy companies and is engaged in production, refining, distribution and marketing of oil and natural gas. The company carries a Zacks Rank #2 (Buy).

The company has outperformed the Zacks categorized Oil & Gas-International Integrated industry over the prior six months. During the aforesaid period, shares of Shell rallied almost 6% while the broader industry gained around 4%.

Other favorably placed stocks from the broader industry include Semgroup Corporation SEMG, Crescent Point Energy Corporation CPG and Sunrun Inc. RUN. All the three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Semgroup reported average positive earnings surprise of 79.10% in the last four quarters.

Crescent Point posted positive earnings surprise in each of the trailing four quarters, the average being 127.16%.

Sunrun delivered positive earnings surprise in each of the preceding four quarters, the average being 134.71%.

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