Shell paying £3.22bn for East Resources

Published on Friday 28 May 2010 21:53

SHELL is paying £3.22 billion to buy US explorer East Resources to give it more exposure to promising shale gas reserves in North America.

The deal would raise Shell's daily gas production in North America by about 7.5 per cent and give it access to a swathe of the Marcellus shale region, which is a crucial source of future US gas production.

The cash deal was agreed with East Resources and its private equity investor, Kohlberg Kravis Roberts (KKR).

Shell also revealed that it had separately bought 250,000 acres of mineral rights in the Eagle Ford shale bed in south Texas.

Shale gas accounts for between 15 per cent and 20 per cent of US gas production, but is expected to quadruple in coming years.

Analysts cautioned that the East Resources deal would put pressure on Shell's balance sheet at a time when the company is planning to spend heavily on other projects.

Panmure Gordon analyst Peter Hitchens said : "Although this is a good move, it will put further pressure on the balance sheet, which is weakening with the high level of organic capital expenditure the group has committed to."

Hitchens added that a weakened balance sheet would keep Shell from increasing its dividend over the next two years.

The company did not comment on how it intended to finance the purchase.

Shell had 5.8bn in cash and equivalents on its balance sheet at 31 March.

Shell is the latest in a line of international oil players that have bought into the Marcellus, including Statoil, Exxon Mobil, Mitsui & Co and Reliance Industries. Shale gas is harder and more expensive to extract because it comes from rock rather than traditional reservoirs. Drilling could also become more expensive due to environmental challenges.

The acquisition came hours after the US government said it would review Shell's plans to begin drilling exploratory wells off Alaska this summer, delaying the project. The project has faced increased scrutiny in the wake of BP's Gulf of Mexico oil slick.