Energy giant Shell (SHEL) has accelerated its push in the gas market with the $13.6 billion purchase of ARC Resources (ARX). The deal provides the UK firm with an extra 4% annual production through to 2030 against its 2025 base.
High quality, low cost
ARC is focused on the Montney shale basin in British Columbia and Alberta, Canada. The deal increases Shell’s exposure to long-duration, low-cost, top-quartile shale gas and liquids, ‘delivering value for decades’ the firm said.
The acquisition combines Shell’s 440,000 net acres of reserves in the Montney formation with ARC’s over 1.5 million acres. Therefore it adds around two billion boe (barrels of oil) equivalent proven plus probable reserves.
Last year, around 40% of ARC’s production was liquids, accounting for some 70% of its revenues. In addition, ARC’s proven plus probable gas reserves have the potential to support Shell’s growth in LNG in Canada.
Compelling deal
‘We are accessing uniquely positioned assets which, combined with Shell’s strong basin level performance, provides a compelling proposition for shareholders,’ commented Shell CEO Wael Sawan.
Shell is financing the purchase 25% in cash and 75% in shares and is paying a 20% premium to ARC’s 30-day average price. The transaction is expected to generate double-digit returns and increase cash flow per share from 2027 onwards.
In today’s world, securing low-cost, long-term alternatives to Middle Eastern energy supplies is a priority. On that count, CEO Wael Sawan looks to have played a blinder. ARC’s operations are situated in exactly the same region as Shell’s existing gas assets in British Columbia and Alberta.
Shell’s assets supply its LNG liquefaction plant and the domestic gas market, and the ARC deal has seriously bolstered production. At just a 20% premium, and with 75% of the consideration payable in shares, it has done so at minimal cost too.
The additional cash component of the deal will be financed from its annual capex budget. Meanwhile, there are expected to be annualised synergies of around $250 million within a year of the deal closing.
Just a couple of weeks ago the firm warned its Q1 gas output, and therefore group earnings, would be impacted by a lack of natural gas. It may take more than one deal to rebalance the portfolio geographically, but today’s news is unequivocally positive.
Moreover, for shareholders, the ARC deal doesn’t change the capital allocation policy. Investors can sleep easy knowing they will continue to receive 40% to 50% of cash flow via dividends and buybacks.
Read the press release here: https://www.shell.com/investors.html
