Financial Post: Shell Canada share battle: “…you can smell the desperation of Royal Dutch Shell PLC…”

Headline: Parental warnings lack heft:

CLAUDIA CATTANEO
The Patch
Financial Post [email protected]

In Shell Canada Ltd. directors’ circular, you can smell the desperation of Royal Dutch Shell PLC in its bid to win the 22% of the Canadian company’s shares it doesn’t already own.

The telltale sign: The reserves-challenged parent kept increasing its bid price — from $40 a share to $43.50, to $44.50, to $44.75 and ultimately to $45, while warning repeatedly it wouldn’t pay a penny more, according to an account of a special committee of Shell Canada’s board headed by Derek Burney.

Of course, it could all be part of the horse-trading that goes on behind the scenes in these kinds of high-level negotiations.

But it also shows a willingness on the part of the company to blink as many times as it takes, regardless of its CEO’s recent threats that he will walk away if the offer doesn’t get the support of at least 50% of the stock. Royal Dutch Shell appears to have forgotten a basic rule of parenting: Don’t make a threat unless you are prepared to follow through.

Royal Dutch Shell is bidding to take out the minority of Shell Canada for $45 a share, or $8.7billion, up from its first formal offer of $40, or $7.7-billion, made in October.

The latest offer was backed by Shell Canada’s independent directors, after a valuation by CIBC World Markets pegged the stock at $42 to $48 a share. Several minority shareholders, though, are holding out for a better deal.

It’s a sound strategy. The bottom line is that Royal Dutch needs Shell Canada minority held shares more than minority shareholders need its money.

For one thing, it’s personal. Failure to close the Shell Canada takeout bid, or to have it turn it into the type of legal mess that Total SA’s takeover of Deer Creek Energy Ltd. has become as a result of some shareholders challenging the takeout price, wouldn’t look good for Jeroen van der Veer, chief executive of Royal Dutch. According to RDS’s own bid circular, the takeout is of “considerable importance” to Mr. van der Veer and he has taken overall responsibility for it.

The business case is strong. The European company is keen to integrate Shell Canada into its own North American operations, mirroring the recent EnCana Corp. and ConocoPhillips transaction that involves a production arm in Canada and a refining and possibly upgrading component in the United States. The arrangement could temper the high costs faced by Shell in the oilsands, where it wants to boost production five times to 700,000 barrels a day.

Then there is the political advantage. This transaction is moving forward without a whiff of political scrutiny, even though it involves the loss of one of Canada’s top head offices. Sure, Shell Canada is already controlled by the European company. It shouldn’t go unnoticed, however, that the Canadian operation is likely to become a branch plant of the larger North American business run from Houston, resulting in a loss of transparency of one of Canada’s largest oilsands projects and of many decision-making jobs.

Royal Dutch has already said that, should the deal go through, there will no longer be a president and CEO for Canada, but a country chairman who will report to a member of the company’s board.

For its part, Royal Dutch is probably relieved Canadian politicians are focused on such other issues as greenhouse gases, having just been forced to sell half its stake in its Sakhalin-2 project, which is building Russia’s first liquefied naturalgas export terminal, to state-run OAO Gazprom because the Russian state demanded control.

Then there is the reserves issue. Royal Dutch is still struggling on that front. A Canadian grab would increase the oil major’s reserves in this country’s two largest projects — the oilsands and the Mackenzie Gas Project, to which it’s attributing little value in its bid. The field, 100% owned by Shell, holds one trillion cubic feet of natural gas and the proposed Mackenzie gas pipeline is the closest it’s been in three decades to moving forward.

And then there’s price. Royal Dutch says the $45 price is full and fair and a 37% premium over the stock’s value before the bid was announced on Oct. 20. Some could argue it’s a bargain since Royal Dutch is buying at a low point in the cycle. The bid price is also barely above what the stock was trading at in July. After that, it plummeted when investors were spooked by Shell Canada’s announcement about cost estimates for a 100,000-barrel-a-day expansion, the highest ever in the sector.

Regardless, this deal along with the potential acquisition of Western Oil Sands Inc. by Royal Dutch, will be closely watched and could be a tipping point for the oilsands business this year. Western, a partner with Shell Canada in the Athabasca Oilsands Project, put itself up for sale last week. If the two companies are acquired, other oilsands deals are sure to follow. If not, there could be more uncertainty for the group and the gloom already weighing on stock prices could continue.