The Chinese unit of
Royal Dutch Shell plc
(
RDS.A
) announced plans to acquire 100% participating interest in the
Production Sharing Contract for the Zitong natural gas project from
Ivanhoe Energy Inc.
(
IVAN
) for approximately $160 million in cash.
Per the terms of the agreement, Shell will pay up to $85 million
as reimbursement for past qualified and recoverable costs incurred
to Ivanhoe. Following the closure of the transaction - expected on
December 31, 2012 - Shell will make another payment of up to $75
million.
On the other hand, Shell will receive the $20 million bond that
Ivanhoe would have presented to the
China National Petroleum Corporation
or
Sinopec
(
SNP
), as part of completion of a supplementary agreement.
Located in China's Sichuan basin, the 90% stake of the Zitong
block was controlled by Sunwing Zitong Energy - Ivanhoe's wholly
owned subsidiary. Sunwing had discovered gas at two wells in
the block. The remaining interest was held by Mitsubishi Gas
Chemical Co.
With this divesture, Ivanhoe targets to turn its attention to
the core business of exploration and production as well as its
proprietary heavy-to-light (HTL) oil upgrading process.
For Shell, this acquisition will expand its overseas footprint
and position it favorably in the Chinese energy sector.
We believe that Shell owns a strong and diversified portfolio of
global energy businesses that offer attractive long-term growth
opportunities. The group's strong inventory of development projects
and increased capital expenditures should help volume growth in the
long run.
We expect Shell to witness accelerating revenue and earnings
growth over the next few quarters, driven by operational/production
efficiency and contributions from strategic programs.
However, due to its integrated nature, Shell is particularly
susceptible to the downside risk from the current turmoil in the
global economy. We are also concerned about the company's high
level of capital spending, which may result in reduced returns
going forward.
As such, we see the stock performing in line with the broader
market and maintain our long-term Neutral recommendation. Shell
currently retains a Zacks #3 Rank, which translates into a
short-term Hold rating.
IVANHOE EGY INC (
IVAN
): Free Stock Analysis Report
ROYAL DTCH SH-A (RDS.A): Free Stock Analysis
Report
CHINA PETRO&CHM (
SNP
): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment
Research