Analysts at UBS said an offer by Royal Dutch Shell plc for the Shell Canada Ltd. shares it does not own could signal consolidation to come among Canadian energy players.

“We believe this transaction could be the kick-off to widespread consolidation in the Canadian oils as majors seek to position themselves with large, low-risk resources,” write UBS analyst Andrew Potter and associate analyst Michael Rimell. “In our view, SU [Suncor Energy Inc.], CNQ [Canadian Natural Resources Ltd.], NXY [Nexen Inc.], and ECA [EnCana Corp.] could all be considered takeout targets.”

Royal Dutch Shell made a C$40/share cash offer for the minority interests in Shell Canada. The proposal values Shell Canada’s fully diluted minority share capital at C$7.7 billion. Royal Dutch Shell owns 78% of Shell Canada Ltd. “The sizable premium Royal Dutch has offered for SHC [Shell Canada] versus other Canadian large cap E&Ps/integrateds highlights how undervalued the Canadian large cap universe is,” the UBS analysts wrote.

The offer represents a 50% premium to Canadian integrated companies, UBS said, and a 110% premium to the average Canadian large cap. “Although the transaction parameters are rich, we would not be surprised to see RD [Royal Dutch Shell] up the bid,” the analysts said in their note.

Indeed, one of Shell Canada’s largest minority shareholders said the offer wasn’t enough. Garey Aitken, a portfolio manager at Calgary-based Bissett Investment Management, told Reuters he felt the offer was “not sufficient.”

The proposed acquisition follows unification of Royal Dutch Shell plc in 2005 (see Daily GPI, June 29, 2005) and is a further step in simplifying its structure. Once Shell Canada is fully combined with the parent company, the business will benefit from a simplified organization, additional economies of scale and portfolio development, Royal Dutch Shell said.

Shell Canada has built a substantial position in Canada’s oil sands and is embarking on a major expansion of production and upgrading capacity (see Daily GPI, Sept. 14). Canada is an important growth area for the company. Bringing Shell Canada fully under the parent company will allow a unified technology plan between Shell Canada and Royal Dutch Shell and full access to the parent company’s financing capabilities.

Royal Dutch Shell has struggled to rebuild its reserve base since a staggering write-down of reserves in 2004 (see Daily GPI, March 9, 2004). A year ago Calgary-based Shell Canada raised its capital investment plan for 2006 60%, to C$2.7 billion, with an eye toward increasing oil and natural gas production by more than 50% by the end of the decade (see Daily GPI, Nov. 18, 2005). The budget earmarked C$2.4 billion for capital expenditures and another C$255 million on related exploration and pre-development expenses. The capex spending increase followed a 60% increase the previous year (see Daily GPI, Nov. 19, 2004).

Shell Canada is the third-largest oil sands producer in Canada and has 936 million bbl of proved and probable oil sands reserves. The company also has a stake in the Canadian Arctic natural gas pipeline project in the Mackenzie Valley, which has been plagued by delays (see Daily GPI, Aug. 4), and the Sable Offshore Energy project in Nova Scotia, which has largely been a disappointment for all parties involved (see Daily GPI, Jan. 10), but could benefit from the Deep Panuke offshore gas project (see Daily GPI, Aug. 30).

Shell Canada’s stock has been a laggard, losing more than 20% since the beginning of the year. However, in Monday afternoon trading on the Toronto Stock Exchange shares jumped 29%. Shell Canada closed up 29.73%. Canadian Natural closed up 2.38%, while Nexen was up 1.84%. EnCana and Suncor were each down less than 1%.

“We think the interests of the Shell Canada Limited minority shareholders are well served by accepting the cash offer we are proposing,” said Royal Dutch Shell CEO Jeroen van der Veer. “Our proposal should create the opportunity for the group to build further on a strong position in Canada, using the strengths that only a company of our global scale can bring.”

Royal Dutch Shell has requested that the Shell Canada board establish a special committee of independent directors to supervise the preparation of a formal independent valuation and to review and make a recommendation with respect to the proposed offer. The parent company said it hopes to pursue a transaction that will be supported by the board. The mailing of the offer will be dependent on the timing of the completion of the independent valuation, a summary of which will be included in the offer circular.

Royal Dutch Shell plc’s formal offer, when made, will be conditional on more than 50% of the outstanding shares (calculated on a fully diluted basis) held by the minority shareholders of Shell Canada being tendered as well as other customary conditions, including the absence of any material adverse change, the obtaining of any relevant regulatory approvals and the absence of any adverse litigation, proceeding or legal prohibition in respect of the offer.

Shell Canada confirmed that it has received the offer. “A meeting of the board of directors of Shell Canada has been held to acknowledge the proposal and deal with matters appropriately,” said Shell Canada CEO Clive Mather. “The board has appointed a special committee of independent directors to consider the proposal from Royal Dutch Shell and to make a recommendation to the board with respect to the proposal.” He said a formal valuation of the common shares of Shell Canada is expected to take several weeks.

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