Shell, MGM Team Up for Exploration

The Canadian arm of Royal Dutch Shell Plc ( RDS.A - Analyst Report ) stepped into a farm-out agreement with Toronto Stock Exchange listed MGM Energy Corporation.

Per the contract, the former will extend funding for the drilling and completion of up to two wells in the Canol shale oil play of Central Mackenzie Valley. In exchange of this, Shell Canada Energy will receive 75% interest in the Exploration License 466B.

Located about 932.1 miles north of Calgary, the Mackenzie Valley is one of Canada’s largest oil fields that offers immense drilling opportunities but remains vastly untapped.

Initially, Shell will invest for the drilling of the First Earning Well and will hold a 37.5% stake in the well. Following the completion of the exploration, Shell will have the option to fund 100% drilling expense to complete a horizontal well – the Second Earning Well – and receive an additional 37.5% interest in EL466B.

Canadian oil and gas firm, MGM Energy, will act as the operator of the First Earning Well and the Second Earning Well. With the completion of the exploration of the Second Earning Well, Shell will control 75% interest and become the operator of the lands and wells.

However, Shell has the option to call off the agreement, if MGM Energy fails to get necessary permits and approvals to drill the first well.

The First Earning Well is expected to be spud in the winter of 2012/13 or 2013/14, depending on the timely receipt of the regulatory approvals.

We believe that Royal Dutch Shell is one of the largest integrated energy firms in the world with a strong and diversified portfolio of development projects that offer attractive long-term opportunities.

The group – renowned for its success in bringing some of the largest and technically challenging capital-intensive projects to fruition – is expected to continue driving revenue and earnings growth over the next few quarters.

However, the company remains susceptible to its exposure to oil and gas price fluctuations, lofty capital spending and international business risks. As such, we see Shell performing in line with the broader market and maintain our Neutral recommendation.

Shell, which operates in the industry with big players such as BP plc ( BP - Analyst Report ) and Total SA ( TOT - Analyst Report ) , currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.