Shell Purchases LNG Assets from Repsol

Brian Hicks

Written By Brian Hicks

Posted March 1, 2013

Royal Dutch Shell Plc (NYSE: RDS.A) will buy up liquefied natural gas assets from Repsol SA (PINK: REPYY) in a deal worth $4.4 billion.

The deal will allow Shell to expand significantly in Latin America and Spain, while Repsol, a Spanish company, stands to avoid a credit downgrade to junk status. It’ll also benefit from Shell’s export capacities in Peru and Trinidad and Tobago.

When financial leases and assumed debt is taken into consideration, Bloomberg reports that the deal expands to $6.7 billion.

This deal is a major advance for Repsol, which had long made the LNG assets sale a central feature of its plans to shore up its falling credit ratings. Around $6 billion in assets were marked for sale.

The credit ratings issue began last April, Bloomberg reports, when Argentina abruptly seized the company’s YPF SA business, which comprised nearly half of Repsol’s oil reserves. That caused Moody’s to drop its credit rating to just above junk status.

The deal is in the works and is expected to wrap up by early 2014. Repsol, reports Fox Business, has said that it expects pre-tax capital gains of $3.5 billion from the deal.

The deal is also an indicator of Shell’s increased focus on natural gas in recent times. Clearly, the company is betting on natural gas taking on greater relevance in the near future. Just this week, the company led a consortium that won Canada’s third LNG export license.

However, the Repsol terminal in Canada does not export LNG, as Fox Business reports. All received LNG is regassified and piped to southeastern parts of Canada and the U.S. In these regions, prices are just too low due to a supply glut, and according to Repsol, they are so low that “medium- and long-term potential” cannot be “adequately valued.” The Canadian terminal’s value is set to be written down by $1.3 billion shortly.

Shell wasn’t the only company courting Repsol for this deal. Gazprom of Russia and France’s GDF Suez SA had both shown clear interest in Repsol’s LNG assets. The New York Times reports that there were many more suitors—as many as a dozen all together.

LNG’s appeal is clearly on the rise, and we should expect to see such deals becoming more and more frequent in the future as LNG becomes a globally-traded commodity, much like oil.

Costs for LNG continue to remain highest in Asia, followed by Europe, while North America continues to experience record-low prices for natural gas. This is rapidly becoming a problem for producers, as there just isn’t much profit to be had from North American gas sales. That’s why many producers are turning ever more toward exports, chiefly to Asia and Europe, in order to increase profit levels.

Shell, meanwhile, has cornered nearly 8 percent of the world’s LNG market, and the Repsol deal could increase Shell’s profits by more than $1 billion annually in cash.

From the New York Times:

“Shell’s worldwide L.N.G. supply position and customer base means we are uniquely positioned to add value to Repsol’s L.N.G. portfolio,” Peter Voser, Shell’s chief executive, said in a statement.

Following the Argentinian takeover, Repsol has been seeking $10.5 billion or more in damages from the country without much luck. Even with an international ruling, things could take a protracted route.

Thus, the company has turned to selling off non-core assets in order to reduce debt and regain position. According to Fitch, the ratings agency, Repsol could see a credit rating uprade if the proceeds from this Shell deal are applied toward paying down debt.

Previously, Shell did not have any access to LNG assets in the Western Atlantic. Now, the Peru and Trinidad and Tobago assets mean the company has a more global reach as far as LNG is concerned. That means Shell would be able to supply its Latin American customers directly from Trinidad instead of operating out of Nigeria.

Meanwhile, the LNG from Nigeria could be shipped over to Asia, as the New York Times reports, all of which means greater efficiencies and profits for the company. Last year, Shell had $9.4 billion in net profits from LNG alone. No wonder they’re looking to grow that business.

Following news of the deal, Repsol closed 4.1 percent higher, at 16.1 euros—its highest close in eight weeks.

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