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Leading integrated energy firm Royal Dutch Shell plc’s (RDS.A - Analyst Report) New Zealand division has decided to drill an oil and natural gas exploration well in the country’s offshore PEP 50119 block, located in the Great South Basin.  

The drilling activity is expected to commence by 2016. However, the company will make a thorough study before starting operations.

Shell believes that there is more than 99% chance of obtaining natural gas from the well. After acquiring the PEP 50119 block in Apr 2012, Shell is now holding 50% operating interest in it. The remaining ownerships are retained by OMV New Zealand Ltd and Mitsui E&P Australia Pty Ltd.

OMV New Zealand Ltd is a New Zealand-based affiliate of integrated oil and gas company OMV Aktiengesellschaft (OMVJF), while Mitsui E&P Australia Pty Ltd is a subsidiary of Mitsui & Co Ltd , a Tokyo-based trading company.  

Since 1911, Shell has been operating in New Zealand. Presently, the company owns and operates major natural gas fields in the country’s Taranaki basin. The basin serves almost 70% of New Zealand’s natural gas needs.

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.

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 look at a better-ranked integrated energy player like YPF SA (YPF - Snapshot Report). The stock sports a Zacks Rank #2 (Buy).

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