Royal Dutch Shell Plc, the world’s largest supplier of liquefied natural gas, agreed to buy LNG assets from Repsol SA for $4.4 billion in cash to expand in Latin America and Spain.
The deal, which helps the Spanish oil company avoid a credit-rating downgrade to junk, gets Shell export capacity in Peru as well as in Trinidad and Tobago, The Hague-based company said yesterday. Shell will take over financial leases and assume debt, bringing the transaction’s total value to $6.7 billion. Repsol’s Canaport terminal in Canada, which imports gas into North America, was not sold.
Acquiring import and export terminals “will allow Shell to realize trading synergies from its global portfolio,” Oswald Clint, an analyst at Sanford C. Bernstein & Co., said in a note. For Repsol, the sale “ensures investment grade credit rating and removes the risk of equity dilution due to a conversion of preference shares,” he said.
The LNG asset sale was the centerpiece of Repsol’s plan to preserve its credit ratings by selling 4.5 billion euros ($6 billion) of assets and take other measures, if necessary, such as swapping preferred shares into convertible bonds.
Moody’s Investors Service cut its rating to one level about junk and gave the company a negative outlook after Argentina seized Repsol’s YPF SA business in April without compensation. YPF made up almost half of Madrid-based Repsol’s oil reserves.
Repsol climbed 4.1 percent to close at 16.1 euros in Madrid trading, the biggest jump in eight weeks.
Argentina’s nationalization followed the Spanish company’s January 2012 announcement of the discovery of 22 billion barrels of potential oil in shale rock in Argentina. Repsol is seeking $10.5 billion for the 51 percent stake in YPF it lost.
Spain’s largest oil company will book a $3.5 billion pretax capital gain from yesterday’s deal and reduce its net debt by 2.2 billion euros ($2.9 billion) from the 4.4 billion-euro total last year.
Repsol’s bonds had rallied as the company was negotiating the deal. Its 1 billion euros of 4.875 percent bonds due 2019 gained 1.9 percent in February, according to data compiled by Bloomberg, quadruple the 0.47 percent increase in the BofA Merrill Lynch Euro Energy Index of bonds. The stock lost 6 percent in the period.
“The successful execution of this deal allows the investment community to refocus on the growth of our production profile, which is outstanding among peers,” Repsol said in a presentation yesterday.
Shell will acquire part of a Spanish LNG import terminal and agreed to supply about 1 million tons of the cooled fuel to Repsol’s regasification plant in Canada over a 10-year period, according to the statement.
The transaction provides Shell with long-term offtake contracts for its own portfolio from Trinidad and Peru, according to Macquarie Capital Europe Ltd. analyst Jason Gammel. Increasing Shell’s flexible capacity could enable it to trade in the spot market to a larger extent, he said. “We are generally bullish on the LNG market through the end of the decade,” he said.
Canaport was offered for sale and will be written down for $1.3 billion. Its 25-year commitments to ship gas into North America were considered a hurdle to closing the deal as the continent’s domestic gas supply swelled from shale fields, two people familiar with the matter said earlier this month.
Repsol’s contracts through Canaport soured after the extracting of gas from shale rock created a glut of the commodity and caused prices to plunge. Shipments from Canaport have fallen 42 percent this winter compared to the year before, Bentek Energy LLC data reported by U.S. regulators show.