Oil major won’t want to be a small fish for long

SOMETIMES being a small fish in a big pond pays off. That is certainly the case for shareholders in Aim-listed Cove Energy, which Shell has agreed to buy for £1.12bn. The 220p-a-share offer represents a 96 per cent premium on Cove’s stock price before it put itself up for sale. Not bad for a bunch of opportunistic oil and gas explorers.

The main attraction for Shell is Cove’s relatively small 8.5 per cent share in a drilling project off the coast of Mozambique, which is known to hold significant liquified natural gas (LNG) reserves.

Shell will also get a toe-hold in the increasingly important east Africa region, the new frontier in LNG exploration. The area is so attractive because of its proximity to those Asia Pacific countries that are expected to drive higher demand in the coming years – the likes of Japan, China, India, the Middle East and Latin America.

China, which is building a string of new LNG import terminals, wants to wean itself off of coal power, and analysts at Bernstein expect it to become the world’s second largest LNG importer by 2020. Japan, the Number 1, is expected to up its own import requirement following the Fukushima nuclear disaster.

Of course, Shell is used to being the biggest of all the fishes. It has no interest in playing the part of small fry and will not be satisfied with such a tiny 8.5 per cent share. It is using the deal to put a price tag on this project and others like it. If it gets the deal done, analysts expect it to approach the other smaller shareholders, BRPL and Videocon, which hold 10 per cent each. If it were to buy them out, it would become the second biggest investor behind Anadarko on 36.5 per cent.

Shares in Cove closed at 227p yesterday, a touch above Shell’s offer. Some investors are holding out hope that Thailand’s PTT, which trumped Shell’s first offer, will come back in and spark a bidding war.

There is a chance this could happen, but it is an outside possibility. Shell is an attractive buyer because of its knowledge of LNG exploration, as well as its experience of dealing with governments like the one in Mozambique.

If it does end up as the winner, expect more M&A ahead. Being a big fish in a small pond is not Shell’s style.

david.crow@cityam.com
Follow me on Twitter: @davidcrow83