A Win-Win LNG Deal For Both Repsol And Shell
BMI View: The sale of Repsol 's LNG assets to Royal Dutch Shell both underscores the challenges currently facing the former and solidifies the latter's significant role in the global LNG market. Th is is a win-win deal for both companies and supports each of their global corporate strategies.
Royal Dutch Shell has agreed to buy Repsol 's liquefied natural gas (LNG) businesses for over US$6bn in combined cash, financial leases, and debt. Th is is a win-win deal for both companies, as Repsol seeks a turnaround in its corporate financials, and Shell continues to increase its exposure in global LNG .
Spanish company Repsol has been engaging in a divestment plan ever since almost half of the company's proven reserves were nationalised in Argentina on the back of the government's expropriation of YPF in early 2012. The company subsequently pos t ed a 6.1% drop in net income in 2012 to US$2.7bn, despite an 11% increase in production and 56% growth in its upstream operating unit's income during the same time period. At risk is the company's credit rating, currently nearing junk status, as it is currently saddled with a significant debt burden. In addition to announcing the sale of its LNG business and other non - core assets, the company also lowered its dividend payout.
|A Slow Post-YPF Nationalisation Recovery|
|Repsol Equity Price Chart, 2-Year|
On the other side of the negotiating table is Shell, which sees Repsol's divestment strategy as an opportunity to double-down on its LNG bet. Indeed, the company's capital expenditure on integrated gas projects reached approximately US$5.5bn in 2012, mostly concentrated on the development of LNG facilities and associated projects. Shell currently owns stakes in six regasification plants (for importing LNG) and eight liquefaction plants (for exporting LNG). In addition, the company is developing large LNG export capacity in Australia, hoping to benefit from anticipated growth in demand in the high-priced Asian gas market. Shell also holds a stake in the Gorgon LNG project, in addition to operating the Arrow LNG project and being involved in the floating LNG (FLNG) Prelude Project ( see our online service, February 19 2013, 'Royal Dutch Shell Disappoints But Keeps Strong Strategic Line').
The acquisition of Repsol's LNG assets, which include a LNG project in Trinidad & Tobago (T&T), as well as another off the coast of Peru, provides the company with LNG capacity in new areas, namely the western Atlantic and the eastern Pacific. This will give the company increased flexibility when meeting its supply commitments, including being able to supply South American customers with LNG from T&T rather than Nigeria, freeing up Nigerian exports for the more lucrative Asian market. Beyond this, the company's global increase in LNG capacity will enable it to benefit greatly from the anticipated booming demand in global natural gas consumption, particularly as an emerging global LNG market continues to grow.
|Global Gas Production And Consumption To Rise Steadily|
|Global Natural Gas Production And Consumption|