Shell Snaps Up East Resources – Analyst Blog

Energy major Royal Dutch Shell Plc. (RDS.A) has agreed to acquire natural gas explorer East Resources Inc. for about $4.7 billion in cash. The transaction, which is expected to close following customary regulatory approvals, will allow Shell to substantially expand its exposure to the North American unconventional ‘tight gas’ plays. It is the second-biggest oil and gas deal in 2010, after BP Plc’s (BP) purchase of deepwater assets from Devon Energy Corp. (DVN) for $7 billion in March.

 

An unconventional source of energy, tight gas is similar to shale deposits and is locked in rock formations that must be cracked open to exploit natural gas reserves. Tight gas reservoirs can be very large, and production can last for decades.

 

Pennsylvania-based East Resources is a privately-owned firm having principal operations in the Marcellus Shale region in the north eastern US. The company has amassed a large acreage position (650,000 net acres) in the prolific Marcellus Shale play, a key natural gas drilling area located throughout Western Pennsylvania and much of the Appalachian Basin. Overall, East Resources controls some 1.05 million net acres, with daily production of 60 million cubic feet equivalent, predominantly in natural gas.

 

We see the East Resources transaction as part of Shell’s long-term strategic plan to focus on growth in its gas business. In line with other supermajors like ExxonMobil Corp. (XOM) and Chevron Corp. (CVX), Shell sees natural gas playing an important part in its future. The company’s targeted volume growth (11% by 2012) will be achieved primarily by new natural gas projects. Shell expects its share of natural gas to rise to 52% of total volumes by 2012.

 

In keeping with its on-going acreage build strategy, the Hague-based energy behemoth also acquired around 250,000 net acres of mineral rights in the Eagle Ford shale play in South Texas.

 

As natural gas prices remain depressed, major oil companies see this as an opportunity for moving deeper into the business, with the hope that demand will eventually recover in the near future. In December last year, ExxonMobil agreed to buy gas producer XTO Energy Inc. (XTO) for about $30 billion.

 

Royal Dutch Shell is currently rated as Zacks #3 Rank (Hold), implying that the stock is expected to perform in line with the broader U.S. equity market over the next one to three months. This is supported by our Neutral recommendation, which implies that Shell shares are expected to perform in line with the overall U.S. equity market over the next six to twelve months. Therefore, we advise investors to retain the stock over this time period.