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Shell Sells Holstein Stake

Zacks Equity Research

Global energy company Royal Dutch Shell plc (RDS.A) entered into a deal with Plains Exploration & Production (PXP), whereby the former will sell its 50% working interest in the Holstein Field. Plains had placed an unsolicited offer to Shell to acquire the interests.

The disposition, worth $560 million, involves the rights of the Green Canyon Blocks 644, 645 and 688 in the Gulf of Mexico. The deal – effective October 1, 2012 – will likely be completed by the end of 2012.

Located at a water depth of 4400 feet, the Holstein Unit is centered on a spar platform and started its production in December 2004. As of July 2012, the assets’ net average daily production was 7,400 barrels of oil equivalent, with 86% being comprised of oil and natural gas liquids with an average American Petroleum Institute gravity of 33 degrees.

The operator of the Holstein Unit – BP plc (BP) – has also agreed to sell its 50% stake in the field to Plains.

The divesture is a part of Shell’s strategic initiatives to re-design its existing asset base and remain competitive in this difficult environment. In early September, Shell Petroleum Development Company of Nigeria Limited – an affiliate of Shell – completed the divesture of its 30% interest in Oil Mining Lease 40 in the Niger Delta, onshore southern Nigeria.

The Hague-based Royal Dutch Shell owns one of the largest integrated oil and gas businesses in the world. The group has a major presence in the Gulf of Mexico and currently drilled three successful appraisal wells at the Appomattox and Vito fields. These properties are expected to commence production during the second half of the decade.

Shell currently retains a Zacks #3 Rank that translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.

We believe that Shell’s strong and diversified portfolio of development projects offer lucrative long-term opportunities to the company and will continue to boost revenue and earnings growth over the next few quarters.

However, the company is particularly susceptible to its high exposure to the downstream business, its major natural gas focus, as well as lofty capital spending, which may result in reduced returns going forward.

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