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Shell (RDS.A) To Divest Hong Kong LPG Business For $150M

Published 04/10/2017, 04:08 AM
Updated 07/09/2023, 06:31 AM

Anglo Dutch oil giant Royal Dutch Shell (LON:RDSa) PLC RDS.A recently signed a deal to divest its liquefied petroleum gas business in Hong Kong and Macau to oil and LPG supplier, DCC Energy Ltd. which is a subsidiary of DCC plc DCCPF. For Shell, the deal is part of portfolio optimization strategy and the $30 billion divestment program for 2016—2018.

Deal Highlights

Per the deal, Shell will offload its interest in the LPG business in Hong Kong and Macau, which it had been operating for 60 years. The business supplies infrastructure to fulfill the energy needs of more than 100,000 households.

As part of the divestment deal, Shell will enter into a long-term brand license agreement with DCC to ensure that the Shell brand remains visible across the LPG business in Hong Kong and Macau.

The deal is valued at $150 million and is expected to close in the first quarter of 2018, subject to certain regulatory consents and operating license approvals.

Post the execution of the deal, the local LPG employees of Shell would become part of DCC Energy.

How will the Deal Benefit Shell?

The deal takes the $30 billion divestment plans of Shell past the two-thirds mark. The company sold $5 billion worth assets last year. This year the company divested more than $15 billion worth of assets. The deal provides the company some uplift in its drive to lower debt following the acquisition of BG Group for $47 billion. The acquisition is expected to reduce the company’s cost, enhance cash flow and return to capital.

The move is also in sync with the company's strategy to upgrade and streamline its portfolio as Shell seeks to boost its upstream footprint. The company wants to concentrate on the downstream activities only on the areas which can reap huge profits for the company.

How Will the Deal Benefit DCC Energy?

The acquisition is in line with DCC Energy’s intention to create a strong and substantial presence in the global LPG market. This is the company’s first acquisition outside Europe and gives it a platform for development in the LPG market in Asia. It will help in enhancing the company’s relationship with Shell and provide with a strong foothold in Macau and Hong Kong.

It is expected that the acquisition of Shell’s LPG business, which supplied about 74,000 tonnes of LPG to its customers last year, will help to drive revenues of DCC. This will create sustainable growth opportunities and value for stakeholders. The company expects the ownership of Shell’s LPG Business to deliver an annual operating profit of 15 million pounds approximately.

The purchase of the Shell business is the latest in a series of acquisitions by DCC. Earlier this year, the company acquired a chain of Norwegian petrol stations from Exxon Mobil Corporation (NYSE:XOM) .

Zacks Rank & Key Pick

Headquartered in Netherlands, Shell is one of the largest integrated energy companies and is engaged in production, refining, distribution and marketing of oil and natural gas.

The company underperformed the Zacks categorized Oil & Gas-International Integrated industry over the prior one year. During the aforesaid period, shares of Shell rallied almost 6.5% while the broader industry gained around 9%.

Shell also has a dismal earnings surprise history. The company posted negative earnings surprise in three of the four trailing quarters, with the average negative earnings surprise being 18.9%.

The company currently carries a Zacks Rank #4 (Sell).

A better-ranked player in the same industry is Eni SpA (TO:E) , which carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1(Strong Buy) Rank stocks here.

Eni is expected to generate a year over year growth of 762% in its earnings in 2017.

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Royal Dutch Shell PLC (RDS.A): Free Stock Analysis Report

ENI (MI:ENI) S.p.A. (E): Free Stock Analysis Report

Exxon Mobil Corporation (XOM): Free Stock Analysis Report

DCC PLC SHS (DCCPF): Free Stock Analysis Report

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