Some of the world’s largest energy companies have been doubling down when it comes to international expansion. For the past few months, the main target for international energy companies has been the U.S. as the Permian Basin is witnessing a boom of production and output.
It appears that some of these firms are now moving past the U.S. into other markets in a bid to expand. Royal Dutch Shell (NYSE: RDS.A) announced today that it would be entering the Australian electricity market in a deal with almost half a billion dollars.
The transaction in question would see Shell acquire ERM Power, an energy supplier for Australian businesses, for a total sum of $418 million. ERM is the country’s second-largest energy retailer that caters primarily to the industrial and business market. What makes this deal noteworthy is the fact that ERM is predominantly a gas producer.
At a time when many big competitors have promised to move to cleaner fuels in the decades to come, Shell has done the opposite and dived right in to gobble up assets in the gas sector.
Although the company does intend to increase its annual spending on power and clean energy business to roughly $3 billion by 2025, it’s traditional oil and gas divisions will remain dominant for a long time. Shell has been striving to become the world’s largest electricity provider but has stated it would only aggressively expand into this territory if it could see margins between 8 to 12 percent.
So far, analysts are saying that this acquisition is a good fit for Shell. “Firstly, it has a gas-only fleet, whereas most other Australian utilities own and operate coal-fired power. Secondly, it is relatively small scale so it will not raise any anti-competitive concerns compared to if Shell acquired a larger utility,” said Nicholas Browne, an expert at consultancy firm Wood Mackenzie according to the Financial Times.
In response to the news, shares of Shell didn’t move much, falling by 0.6 percent which is understandable since the news isn’t big enough to warrant a massive shift in such a large company. Over the past month or so, the stock ended up taking a big downturn, giving up around 14 percent since late July as prices dipped from $64 to $56 per share. Analyst expectations on the stock are mildly bullish, but there are a handful of experts who have a “hold” rating on Shell.
Royal Dutch Shell Company Profile
Royal Dutch Shell is an integrated oil and gas company that explores for, produces, and refines oil around the world. In 2018, it produced 1.9 million barrels of liquids and 11.2 billion cubic feet of natural gas per day. At year-end 2018, reserves stood at 11.4 billion barrels of oil equivalent (including 1.3 billion for equity companies), 37% of which consisted of liquids.
Its production and reserves are in Europe, Asia, Oceania, Africa, and North and South America. The company operates refineries with capacity of 2.9 mmbd located in the Americas, Asia, Africa, and Europe and sells 18 mtpa of chemicals. Its largest chemical plants, often integrated with its local refineries, are in Central Europe, China, Singapore, and North America. – Warrior Trading News
