Anglo-Dutch behemoth Royal Dutch Shell Plc (RDS.A) signed China’s first Production Sharing Contract (PSC) for shale gas drilling activities with China National Petroleum Corporation (“CNPC”). However, none of the companies disclosed the financial terms of the agreement.
Per the deal, Shell and the Chinese state-controlled company will explore, develop and produce shale gas in the Fushun – Yongchuan block. The exploration region spreads over 1,350 square miles in the Sichuan basin.
Shell – which holds a strong position in the gas market – will extend upgraded technologies and operational know-how for the development of the shale-gas properties.
As per U.S. Energy Information Administration, the U.S. has successfully implemented hydraulic fracturing – a technique utilized for shale gas exploration and has emerged as the world’s leading gas producer. Although China is estimated to have 50% more shale gas reserves than the U.S., the former is yet to fully develop its resources.
Shell and CNPC share long-standing business ties. In mid last year, both the companies formed a Global Alliance Agreement to collaborate and cooperate on future projects in China and overseas.
We believe that these alliances form part of Shell’s long-term strategic plan to capture growth opportunities within the growing Chinese market and its adjoining territories.
Royal Dutch Shell, operates in the industry with big players such as BP plc (BP) and Total SA (TOT), currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. Longer-term, we are maintaining our Neutral recommendation on the stock.
We believe that Shell offers a strong and diversified portfolio of development projects that offer attractive long-term benefits. The group is expected to continue accelerating revenue and earnings growth over the next few quarters given its aggressive cost reduction initiatives, exit from unprofitable markets and organizational streamlining.
However, Shell remains particularly susceptible to the downside risk from the current turmoil in the global economy. We are also concerned with the group’s high level of capital spending, which may result in reduced returns going forward.
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