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Shell in Asset Development Deal
Royal Dutch Shell plc ( RDS.A - Analyst Report) – through its affiliate SWEPI LP – entered into an asset development agreement with Fort Worth, Texas-based Quicksilver Resources Inc. .
Per the terms of the joint venture signed between the two aforesaid companies, they will be involved in developing their oil and gas holdings spanning across the Sand Wash Basin in Northwest Colorado. The companies are expected to cover more than 850,000 acres in the basin and set up an Area of Mutual Interest ("AMI").
Each company will transfer 50% of its working interest in the majority of their acreage in the Sand Wash Basin to the other party. This will also endow each company with the right to 50% stake in any acquisition within the AMI.
Quicksilver will also be paid an undisclosed compensatory amount from SWEPI for its large share in acreage contribution compared to Shell.
SWEPI, subject to agreement, will likely act as the operator for most of the property, while Quicksilver will continue operating wells drilled prior to the agreement along with other assigned lands.
The deal – awaiting customary rules and conditions, is expected to be closed by the end of 2012.
The Hague-based Royal Dutch Shell owns one of the largest integrated oil and gas businesses in the world. Shell, currently retains a Zacks #3 Rank that translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.
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 facilitate volume growth over the long haul.
However, the company is particularly susceptible to its high exposure to the downstream business, its major natural gas focus, as well as lofty capital spending, which may result in reduced returns going forward.