Shell to Buy Cove Energy for $1.8B

Energy Reuters

Royal Dutch Shell has agreed to buy Cove Energy <COVE.L> for 1.12 billion pounds ($1.8 billion), lifting its offer to access East Africa's huge gas reserves, but failing to quell hopes of a bid battle for the Mozambique-focused explorer.

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Cove's directors recommended the offer from oil major Shell, which matched rather than beat a rival offer made by Thai state-controlled oil firm PTT Exploration and Production Pcl <PTTE.BK> (PTTEP) in February, as Shell betted that its expertise would help secure the deal.

"PTTEP is currently considering its options and will make a further announcement as and when appropriate," the Thai firm said in a statement on Tuesday.

Industry interest in East Africa has been gathering pace after huge gas discoveries were made there, with the region tipped to become a major natural gas producing region supplying liquid natural gas (LNG) to energy hungry Asian markets.

Shares in Cove traded above Shell's 220 pence per share offer, up 4.6 percent to 227 pence at 1145 GMT, signaling investors are hopeful of a higher bid.

"Competing offers can still be made and the shares will now likely trade to a slight premium on the hope that PTTEP will trump Shell," said Investec analysts.

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However, Westhouse Securities analyst Andrew Matharu said Mozambique would likely favor Shell's offer.

"A key component of this is how the Mozambique authorities want to develop their resources and a project of this scale needs an oil major with the financial resources and the expertise of bringing world class scale projects to fruition so you need someone like a Shell," he said.

Shell said the deal was conditional upon approval from the government of Mozambique amongst other things, adding that it includes a break fee of 11.1 million pounds if Cove later accepts a rival bid.

On a usual timetable, a competing offer would have a window of around one to two months to emerge.

Cove's directors, in possession of a collective 4.38 percent stake in the company, said they would be accepting the offer.

TAX ISSUE

Both Cove and Shell declined to comment on how capital gains tax which will be owed to Mozambique upon the sale of assets in the country will be paid.

Cove said earlier in April that it will be subject to a tax rate of 12.8 percent on the capital gains arising from the sale of its Mozambique assets, clarifying that a levy would be applicable after a period of uncertainty which analysts had warned could impact the sale.

"It is still not clear who, or how the capital gains tax associated with the Cove sale will be paid to Mozambique," said Canaccord Genuity analyst Braden Purkis.

"However, it is clear that Cove shareholders will receive 220 pence in cash for each share held," he added.

Cove's main asset is an 8.5 percent stake in the Rovuma Offshore Area 1 in Mozambique, where operator Anadarko <APC.N> has said recoverable reserves could top 30 trillion cubic feet of natural gas.

Mirabaud Securities analysts said Cove's stake seems a small holding for a company the size of Shell, which is one of the world's biggest LNG players.

"We would look for it to take further equity over the coming months," they said.

In addition to Anadarko, Japan's Mitsui <8031.T> and Indian groups Bharat Petroleum <BPCL.NS> and Videocon <VEDI.NS> each own 10 percent stakes in the Rovuma license.

Other companies with gas discoveries in the region include Italy's Eni <ENI.MI>, whose field neighbors Cove's Rovuma area, and to the north of the maritime border, Norway's Statoil <STL.OL>, which has made a find in Tanzanian waters.

Shell had previously made a $1.6 billion approach for Cove in February, before PTTEP beat the offer, prompting hopes of a bidding war, with an Indian consortium saying at one point it was also considering entering the fray.

Separately, Mozambique said on Tuesday that it will launch a new bidding round for exploration licenses in the southern part of the Rovuma basin by the end of this year.

($1=0.6213 British pounds)

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