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Shell, Repsol Wrap Up LNG Asset Sale

Zacks Equity Research

Europe’s oil giant Royal Dutch Shell plc (RDS.A) closed the acquisition of liquefied natural gas (LNG) assets of Repsol, S.A. (REPYY) outside North America. The transaction was completed for a net cash purchase price of $3.8 billion, lower than the originally expected $4.4 billion that Shell agreed to pay in Feb 2013. The reduced value could be traced back to the $200 million sale of the Basque power plant to BP plc (BP) by the Spanish oil and gas company in October and the overall financial position of the company. The assets under consideration include liquefaction facilities in Trinidad & Tobago that would supply to the Atlantic, and in Peru that would supply to the Pacific.

Shell also obtained the opportunity to expand its LNG marketing business by taking up the liability related to the existing leases for the LNG ship charters worth $1.6 billion, against the previously announced $1.8 billion.

Fourth quarter 2013 capital expenditure will reflect $3.4 billion of the total consideration. The remaining $2.0 billion – including the $1.6 billion debt – will be covered in 2014. The acquisition is expected to be immediately accretive to Shell’s cash flows and will boost LNG volumes for the company by 7.2 million tons per annum (mtpa). Also, as part of the agreement, Shell has entered into a 10-year agreement to supply about 0.1 mtpa of LNG to the Canaport LNG terminal in Canada owned by Repsol.

U.K.-based Shell is the largest oil company in Europe and has worldwide operations. It is involved in various activities related to oil and natural gas, chemicals, power generation, renewable energy resources, and other energy related businesses.

Though a healthy dividend yield and reasonably cheap valuation are positives for Shell, we remain concerned about the company’s high exposure to the downstream business, as well as its major natural gas focus and lofty capital spending.

Royal Dutch Shell currently holds a Zacks Rank #4 (Sell), implying that it is expected to underperform the broader U.S. equity market over the next one to three months. Meanwhile, one can consider other oil integrated stocks like the Zacks Ranked #2 (Buy) YPF S.A. (YPF).

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