Confirmation of the ability of auctions to bid up asset prices is implicit in the steep premium Shell is proposing to pay for Cove Energy. The gas and oil major is offering 195p per share in cash, or £992m for the lot. That is 15-35p ahead of City expectations and represents an eyebrow-raising 73 per cent premium to the undisturbed price.
But hold hard. After a century in the oil business Shell is unlikely to have been belatedly infected with the virus of speculation endemic to exploration investment.
Cove’s main asset is an 8.5 per cent shareholding in a block of the Rovuma gas field off the coast of Mozambique. The operator Anadarko estimates recoverable reserves in this block at 15-30tn cubic feet. However, a rival operator tapping the same broader reservoir recently upped the estimate for its own block by 7tn cubic feet of gas “in place” to 29tn cubic feet. So analysts suspect there is more gas down there than first anticipated.
At the top end of Anadarko’s reserves estimate, Shell would pay an unexceptional 61.5 cents per million cubic feet. The group itself says it pays no more than $3 per barrel of oil equivalent for assets, and that the Cove deal would come in under that ceiling.
Besides, buying Cove gives Shell an entrée into Mozambique and with it a better feel for the value of Anadarko’s 36.5 per cent stake in Rovuma, which it may be interested in buying. If the deal goes through, City investors will get a fair price and Cove founder John Craven a deserved £18m windfall. But if it you are looking for irrational exuberance, it would need to come from a counter-bidder, rather than a company modestly named after a bottom-dwelling mollusc.
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