Why Royal Dutch Shell Needs To Acquire InterOil Now
by Resourcecarb
SeekingAlpha
February 19, 2013
Royal Dutch Shell (RDS.A) is perhaps the best example of a major that is suffering from diminishing returns on capital, faltering reserve replacement ratios (RRR), and significant excess capital yielding paltry returns. The stock has declined 4.83% year-to-date and 9.95% over the last year, while the S&P 500 is up 6.8% and 11.5% respectively in these periods. Shell's dramatic underperformance was exacerbated subsequent to the company's fourth quarter earnings release at the end of January. Shell generated a worldwide unit profit of just $14.18/boe, down 17% from a year ago and 22% sequentially, while its Americas division generated a unit loss of $0.99/boe, down 110% from a year ago and 39% sequentially.
Following the delivery of its "big three" projects, Pearl, Qatargas 4 & Athabasca, Shell's future growth is set to be derived from in excess of 25 smaller and lower return assets. Approximately 40% of this growth is attributed to unconventional assets in North America, where realizations are likely to remain compressed. Shell's heavy exposure to high-cost Australian LNG and US unconventional natural gas, in conjunction with its lack of momentum in exploration, demonstrate the company's inability to deploy capital on high return generating opportunities in recent years. Shell's 2012 organic reserves replacement of 50%, which includes price effects, is below its peers' subpar average RRR and has resulted in the company's increasing its estimated exploration expenditures to more than $7 billion in 2013 from $6 billion last year.
Though Shell is on track to deliver total 2012-2015 operating cash flows of $200 billion at $100/bbl Brent crude, the company's misallocation of capital to crowded and low return profile hydrocarbon plays has depleted investors' confidence. Shell seems to have fallen into the trap of chasing projects that are perceived as safe either because they are in benign jurisdictions or because they are the types of assets in which other majors are interested. In doing so, the company has exacerbated its risk profile by paying up for projects that depend on flat to rising commodity prices in order to generate acceptable returns. Shell's woes in Alaska are a good example of the risks inherent in a region that conventional wisdom considers to be safe. The company has already spent $2.2 billion for leases to drill in offshore Alaska and approximately $2.8 billion for operations in the area over the past six years, without making any new discoveries. Shell failed last year to complete two exploration wells in offshore Alaska during the short ice-free summer season, and its drilling rig ran aground after breaking free from tow ships in high seas.
Though Shell was early in recognizing East Africa's LNG potential, the company dropped out of a bidding war with PTT Exploration & Production Pcl, Thailand's biggest publicly traded oil and gas explorer, for Cove Energy, an East Africa focused independent E&P company with an 8.5% interest in Area-1 offshore Mozambique.
ere was more success offshore where the Uramu, Pasca and Pandora discoveries were made in the late 1960's through the early 1990's. Reef discoveries were made, but the fields were not large enough to warrant development. The fractured limestone discovered onshore resulted in the conclusion that the Miocene depositional environment in the Eastern Papuan Basin was deep water marine, and hence there was a complete dearth of interest by majors in deploying capital on exploration in the region. Shell, for example, effectively exited the country by selling its Shell Papua New Guinea Limited subsidiary to InterOil in 2006 while Exxon (XOM) remained focused on exploration in PNG's highlands to identify additional gas resources to underpin its PNG LNG Project.
