Royal Dutch Shell plc (LSE: RDSA, RDSB; NYSE: RDS.A, RDS.B; AMS: RDSA, RDSB) announced two deals that will see Shell sell all of its in-situ and undeveloped oil sands interests in Canada for $7.25 billion, and reduce its share in the Athabasca Oil Sands Project (AOSP) from 60 percent to 10 percent.
Under the first deal, Shell will sell to a subsidiary of Canadian Natural Resources Ltd (TSE: CNQ) its entire 60 percent interest in AOSP, its 100 percent interest in the Peace River Complex in-situ assets, including Carmon Creek, and a number of undeveloped oil sands leases in Alberta, Canada. The consideration to Shell from Canadian Natural is approximately $8.5 billion (C$11.1 billion), comprised of $5.4 billion in cash plus around 98 million Canadian Natural shares currently valued at $3.1 billion.
Canadian Natural is one of Canada’s largest energy companies and a leader in the oil sands, with a market capitalization of approximately $35 billion (C$46 billion).
Under the second deal, Shell and Canadian Natural will jointly acquire and own equally Marathon Oil Canada Corp (MOCC), which holds a 20 percent interest in AOSP, from an affiliate of Marathon Oil Corp (NYSE: MRO) for $1.25 billion each, to be settled in cash.
On completion of these deals, Canadian Natural will be the operator of the AOSP upstream mining assets, and Shell will continue as operator of the Scotford upgrader and Quest CCS project, located next to the 100 percent Shell-affiliate owned Scotford refinery and chemicals plants. This arrangement is expected to allow Shell to maximize value in its competitive Canadian Downstream business and leverage proprietary technology.
Shell will remain as operator of AOSP’s Scotford upgrader and Quest carbon capture and storage (CCS) project.
The deals are expected to close mid-2017, subject to customary closing conditions and regulatory approvals.
“This announcement is a significant step in re-shaping Shell’s portfolio in line with our long-term strategy,” said Shell Chief Executive Officer Ben van Beurden. “We are strengthening Shell’s world-class investment case by focusing on free cash flow and higher returns on capital, and prioritizing businesses where we have global scale and a competitive advantage such as Integrated Gas and deep water. The proceeds will accelerate free cash flow and reduce gearing and make a meaningful contribution to Shell’s $30 billion divestment program.”
“Shell has been in Canada for more than 100 years and we plan to continue our presence as one of the country’s largest integrated energy companies,” said Shell Canada President and Country Chair Michael Crothers. “We are enhancing returns in our important Downstream business and leveraging our world-class manufacturing capabilities through the integration opportunities that come with continuing to operate the Scotford upgrader and Quest CCS project, located next to the Shell Scotford refinery and chemicals plants.”
In addition to the cash proceeds and Canadian Natural shares, the divestment includes additional intellectual property agreements valued at up to $285 million and a long-term supply agreement for the Scotford refinery. The transactions will potentially allow for additional cost reductions and continued value chain optimisation for Shell.
The net cash proceeds received from these transactions will be used to pay down debt. In the full year 2016, the assets being divested to Canadian Natural recorded profits before tax of negative $22 million with upstream production averaging around 160 thousand barrels per day. For the year ended 31 December 2016, reserves associated with the assets being divested to Canadian Natural were 2 billion barrels and the gross assets at that date were approximately $12 billion. The deals are estimated to result in a post-tax impairment of $1.3 to $1.5 billion. Shell’s share position in Canadian Natural will be managed for value realization over time.
Shell said it may swap its 50 percent purchased interest of MOCC for a 20 percent interest in assets of the Scotford upgrader and Quest CCS project, in which case, Shell would fully exit AOSP’s mining operations and hold a 20 percent interest in the Scotford upgrader and Quest CCS project.
Shell retains significant operations in Canada that are not impacted by these transactions, including in Upstream shales with a large Duvernay and Montney acreage position; Downstream through chemicals, refining and marketing; and in Integrated Gas with the proposed LNG Canada project.