Shell Signs Subsea Deal

10 April 2012

A/S Norske Shell – a subsidiary of Royal Dutch Shell plc (RDS.A) – signed a Letter of Intent for a contract, worth NOK 800-900 million, with Norway based subsea firm Ocean Installer.

Per the agreement, Ocean Installer will advance Engineering, Procurement, Construction, Installation (EPCI) services to Shell for the development of the Draugen field.

The scope of the contract also includes the development of subsea infrastructure of the Draugen field, where A/S Norske Shell intends to drill four infill wells to boost the ultimate recovery factor and speed-up oil production.

Ocean Installer stated that it will execute all the stages of the operation, starting from planning and manufacturing to installation and implementation of connections. The company will also be involved with the procurement and installation of oil production and gas lift flexible flowlines about 11.5 miles long, along with other associated detailing.

Located on Block 6407/9 in the Norwegian sector of the North Sea, the Draugen oil and gas field is operated by Shell with a 26.20% interest. BP Norge AS – a subsidiary of BP Plc (BP), the Norwegian unit of Chevron Cooperation (CVX) and state-owned company Petoro AS controls the remaining 18.36%, 7.56% and 47.88%, respectively.

Shell and Ocean Installer plan to work on the contract immediately, with completion expected in 2014.

Royal Dutch Shell currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Longer-term, we are maintaining our Neutral recommendation on the stock.

We believe that Shell offers a strong and diversified portfolio of development projects that offer attractive long-term benefits. The group is expected to continue accelerating revenue and earnings growth over the next few quarters given its aggressive cost reduction initiatives, exit from unprofitable markets and organizational streamlining.

However, Shell remains particularly susceptible to the downside risk from the current turmoil in the global economy. We are also concerned about the group’s high level of capital spending, which may result in reduced returns going forward.