Zacks_Analysts' Blog : Shell to Buy Chinese Asset - Analyst Blog

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.