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Shell (RDS.A) Bets Big in GoM, Spends $84.8M in High Bids

Zacks Equity Research

Royal Dutch Shell plc RDS.A recently grabbed the largest number of blocks in the auction held by the U.S. Bureau of Ocean Energy Management (“BOEM”) for U.S. Gulf of Mexico (GoM) Lease Sale 252. A total of 30 companies participated in the bidding process. The biannual regionwide auction witnessed 257 bids for 227 blocks in total, fetching $244.3 million, 37% higher than the last round held in August 2018. The auction covered around 1.3 million acres of the 78.5 million acres offered in the process.

Shell Expands Footprint

Shell spent $84.8 million on 87 high bids. It offered $7.2 million for Alaminos Canyon 342 and $8.2 million for Alaminos Canyon 343 — the company’s top two bids. The energy major is operating in the U.S. Gulf of Mexico for more than six decades. The recent bids are expected to further strengthen the company’s footprint in the region. The company is currently developing a new deep-water project in the area, Appomattox, which will be its biggest floating platform in the region. In June 2018, Shell brought Kaikias deep water development online in the GoM, which has a breakeven price level less than $30 a barrel.

Other Major Bidders

Equinor ASA EQNR placed the second-highest bids worth $29.2 million. The Norwegian energy giant bid $24.5 million on Mississippi Canyon 801, the highest in the bidding process. Oil and gas exploration and production company, Anadarko Petroleum Corporation APC bid $4.1 million for Mississippi Canyon 344. It submitted 27 high bids. BP plc BP made 23 high bids amounting to $15.5 million. Other companies that offered bids in the auction include Hess Corporation, Chevron Corporation and Kosmos Energy. Notably, Equinor and Kosmos jointly acquired Keathley Canyon 964 through a $7-million bid. Kosmos started operations in the Gulf of Mexico in 2018, following a $1.2-billion acquisition of Deep Gulf Energy.

Offshore Projects Coming Back to Life?

In view of the number of bidders and their high bids, it is safe to say that offshore projects have again become popular with producers, as the current WTI crude is trading around $60 per barrel. Effective cost controls and recovering oil prices have made offshore operations attractive again. There is a fundamental difference between offshore and onshore operations. In terms of development of resources, onshore production reaches peak levels faster than its offshore counterpart. However, once online, offshore developers can produce from the vast resources for decades and that too at a higher rate.

Pipeline bottlenecks in shale plays like the Permian Basin have reduced producers' margins in recent times. Improving the infrastructure will take time and need investments. Hence, investing in offshore production is an attractive option at the moment.

Price Performance & Zacks Rank

Headquartered in The Hague, Netherlands, Shell’s stock has gained 15.5% in the past year compared with 19.2% collective growth of the industry it belongs to. Shell currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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