Shell To Vend Corrib Project Assets In Ireland For $1.23B

European oil giant Royal Dutch Shell (LON:RDSa) PLC RDS.A recently inked a $1.23 billion deal to divest interests in the Corrib gas venture off the North Mayo Coast of Ireland. The move marks the exit of the upstream business of the company in Ireland.

Deal Highlights

Per the deal, Shell E&P Ireland Limited, a subsidiary of Shell, will offload its 45% stake in the Corrib natural gas field project to a subsidiary of Toronto-based Canada Pension Plan Investment Board. Shell’s share of output from the Corrib gas field was 27,000 barrels of oil equivalent per day last year.

The total consideration of the deal is valued at around $1.23 billion. Shell will receive $947 million initially and from 2018 to 2025 the company will get an additional payment of up to $285 million, subject to gas prices and production.

Subject to regulatory approvals and satisfactory closing conditions, the deal is scheduled to close in the second quarter of 2018.

Post the closure of the deal, CPP Investment Board will sell a portion of its acquired assets to Canada-based oil and gas producer Vermilion Energy Inc. (TO:VET) – which already owns an 18.5% stake in the Corrib project – making it the operator of the gas field with 20% interest.

Vermilion will maintain offices in Mayo and Dublin and retain Shell’s workforce involved in the project. The other partners in the project include CPP Investment Board and Norway-based Statoil (OL:STL) ASA (NYSE:STO) with 43.5% and 36.5% non-operated interests respectively.

With the asset sale agreement Shell will no longer be involved in the project. The company will suffer a loss of around $900 million on its investment owing to this. It is likely to take a $350 million impairment charge in the second quarter of 2017. Further Shell will incur an additional $400 million loss owing to euro appreciation against dollar. Shell will also bear a loss of $150 million related to the ongoing operation of the project.

However, the deal does not mark the exit of Shell from Ireland. The company will still continue to have its presence in Ireland through its aviation joint venture, Shell and Topaz Aviation Ireland Ltd.

Deal Motive

For Shell, the deal is part of its portfolio optimization strategy and the $30 billion global divestment program for 2016–2018. The deal takes the $30 billion divestment plans of Shell forward. The company had sold assets worth $5 billion last year. In 2017, the company divested assets worth more than $15 billion. The deal provides the company some uplift in its drive to lower debt following the acquisition of BG Group for $47 billion. The divestment 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 amid an industry downturn. Shell seeks to simplify the operational structure by offloading assets. Further, the deal also complements Shell’s strategy to mitigate climate risks and focus on renewable energy as Corrib gas field has been facing severe opposition by environmentalists and locals since 2005 for polluting the environment.

The deal will enable CPP Investment Board to diversify and enhance its geographical foothold. Currently, the company owns around $4.5 billion of assets in Western Canada, majority of which is located in Western Canada. Recently, Canada’s biggest public pension fund inked two $1 billion deals in Houston. It signed an agreement with Encino Energy, LLC to purchase oil and gas assets in Houston for a billion and also acquired real estate investment trust Parkway, Inc. (NYSE:PKY) for $1.2 billion.

Zacks Rank

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. Shell has a dismal earnings surprise history. The company reported negative earnings surprise in three of the four trailing quarters, the average being 15.05%.The company, under Zacks categorized Oil & Gas-International Integrated industry, currently carries a Zacks Rank #5 (Strong Sell).

Royal Dutch Shell PLC Price

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