Royal Dutch Shell Plc (RDS.A) has proposed a $1.6 billion (?992.4 million) bid to acquire U.K.-listed Africa-focused oil explorer Cove Energy Plc. Should the deal go through, it will open up a new gas frontier for the Anglo-Dutch company in Kenya and Mozambique, the latter of which has already emerged as a major center for liquefied natural gas (LNG) projects.

As per the offer – which is still contingent on regulatory approval, including consent from Mozambique government – Cove stockholders would get 195 pence in cash for each share they hold. At Cove’s January 4 closing stock price of 112.5 pence – the day before the company put itself up for sale – the deal values the Dublin-based company’s shares at 195 pence each, a 73.3% premium.

Founded in 2003, Cove’s principal asset is its 8.5% stake in the Rovuma Area 1 offshore block in Mozambique, where operator Anadarko Petroleum Corp. (APC) believes potential recoverable reserves could top 30 trillion cubic feet of natural gas, suitable for LNG projects. Apart from Mozambique, Cove also has interests in neighboring East African nations Tanzania and Kenya.

With its proximity to the fast growing major economies like China and India, together with all the big discoveries made in the region, East Africa is fast emerging as a key gas hub. Recently, Italy’s Eni SpA (E) has made its own offshore gas discovery in a Mozambique field, while Norwegian oil and gas firm Statoil ASA (STO) has made a find in another East African nation, Tanzania.

Shell, which already has a presence in East Africa through its cooperation with Brazil’s state-run energy giant Petrobras (PBR) in Tanzania, has so far been unsuccessful in the region. However, all this could change with the proposed acquisition of Cove.

Winning Cove would not only mark The Hague-based group’s entry into exciting new hydrocarbon provinces in Kenya and Mozambique, but also provide it with strength and further diversification of its existing worldwide LNG portfolio of production and development projects at a time when demand for natural gas is likely to bounce back due to China’s rising energy needs. Incidentally, Shell is one of the globe’s leading LNG producers, with equity sales volumes of 18.83 million metric tons a year in 2011.

Royal Dutch Shell ADRs currently retain a Zacks #4 Rank, which translates into a short-term Sell rating. Longer-term, we are maintaining our Neutral recommendation on the stock.

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