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Shell (RDS.A) to Bid $10B for BHP’s U.S. Shale Assets


In an attempt to boost its stake in the U.S. shale assets, Royal Dutch Shell plc RDS.A is reportedly teaming with the private equity firm, Blackstone Group, to place a $10 billion bid for the joint takeover of BHP Billiton Limited’s BHP American shale operations.

The Anglo-Dutch oil giant and Blackstone are just one of the several bidders for BHP Billiton’s U.S. assets, before a deal is struck later this year. Notably, private equity players have been ramping up their investments in the U.S. shale assets for the last few years, as the industry downturn has reduced the capital spending of the energy companies. Recently, Devon Energy Corporation DVN also offloaded its Barnett shale assets in Texas to a private equity player for $553 million. Partnering with the deep-pocketed private equity player provides Shell with an additional boost.

If Shell succeeds to win the bid, it will be the largest takeover for the energy supermajor since the $50 billion BG Group buyout in 2016. It will help to drive the company’s production growth and cash flow generation. The company began its drilling operations in Permian in 2012 and intends to ramp up its exploration momentum in the low cost-high margin Permian Basin to drive earnings and growth.

Meanwhile, in a bid to streamline its portfolio, BHP Billiton had been contemplating to exit the U.S. onshore shale business since last year amid pressure from the activist investor, Elliott Management Corporation, a hedge fund firm. BHP Billiton holds acreage across four U.S. shale plays including the prolific Permian Basin, Eagle Ford, along with Fayetteville and Haynesville plays. The shale plays have failed to generate strong returns and is therefore a relatively less capital efficient holding in its portfolio.

We also notice that BHP Billiton has reduced capital and exploration expenses on its onshore U.S. assets, shifting its focus toward brighter prospects. For instance, in fiscal 2017, exploration and capital expenses plunged 32% year over year to $5.2 billion.

Importantly, the company intends to swap its onshore assets with offshore ones to pull out the American shale plays. Notably, last month BHP Billiton nixed the sale of some of its oldest fields offshore Australia, jointly held by the world’s largest miner and oil supermajor, ExxonMobil Corporation XOM. The companies have now decided to retain the ownership and operation of such assets to take advantage of the recovering commodity market.

Zacks Rank

Headquartered in Netherlands, Shell is one of the largest integrated energy companies engaged in production, refining, distribution and marketing of oil and natural gas. The company’s strong and diversified portfolio of global energy businesses, along with synergies from BG buyout offer attractive long-term growth opportunities. The company carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

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