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Shell collecting

22 Feb 2012 By Kevin Allison

Shell is paying a full price to gain exposure to promising natural gas prospects off the Eastern coast of Africa. The oil group’s $1.6 billion offer for Cove Energy represents a 70 percent premium to the AIM-listed energy explorer’s undisturbed share price. Cove may be tiny, but its assets are attractive. With more than $11 billion of cash on hand, Shell can easily afford it. If Asian gas prices stay high or Cove’s exploration projects deliver, this small but highly priced deal may be worth the bother.

Cove’s main attraction is an 8.5 percent stake in an as yet undeveloped gas find off the coast of Mozambique. The field is thought to contain between 15 trillion and 30 trillion cubic feet of recoverable gas. Take the average of those two figures, and the purchase price equates to about $4.60 per barrel of oil equivalent, according to Bernstein Research – or $4.10/boe, excluding cash on the balance sheet. That’s roughly double the average of $2.30/boe that Shell has forked out for other gas explorers recently.

Overpaying is overpaying, regardless of how big or small the deal is. But Cove thinks the Mozambique assets alone could be worth up to $1.6 billion, based on optimistic assumptions about the field’s gas reserves and the size of the export capacity from the field. Crucially, it also assumes that Asian buyers keep paying dear prices for gas. The region may be short of liquefied natural gas (LNG) now, and oil-linked Asian contracts should keep a floor under prices. But that dynamic could change by the time the Mozambique supplies come onstream near the end of the decade – especially if U.S. companies win approval to build big LNG export hubs.

Still, Cove’s other exploratory tracts in Mozambique, Kenya and Tanzania could always come good. Part of Cove’s premium price can also probably be justified by lower costs – a big LNG export facility should be cheaper to build and operate in Mozambique than in Australia, where Shell is also investing heavily in gas. Shell can also arguably get more out of Cove’s assets than other putative buyers who lack its gas know-how, financial clout, and marketing savvy. It’ll take some luck, but the deal might just end up looking very clever.


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