Putin Backs Shell Into a Corner

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Includes: AAUKY, APC, BHP, CHK, COG, COP, DVN, MRO, MUR, OXY, PXD, RDS.A, TLM, VALE
by: Joseph L. Shaefer

Would that it weren't for this reason, but Mr. Putin's increasingly heavy-handed dictatorial proclivities are going to benefit some of our companies. In November, I wrote that Shell (NYSE:RDS.A) was going to have to come up with some big reserves in order to continue as a major player among integrated oils. Instead of buying Shell, I advised buying the type of company that I think Shell must buy if they are to increase their reserves and remain a serious player on the world energy stage. Among these are our currently-owned Chesapeake (NYSE:CHK), Anadarko (NYSE:APC), and Conoco Phillips (NYSE:COP). I also personally own, and consider them a possible buyout from a company like Shell, EOG (NYSE:EOG) and Ultra Pete (OTC:UPL). Others you might want to take a look at are former portfolio holdings Marathon (NYSE:MRO) and Devon (NYSE:DVN), as well as Cabot (NYSE:COG), Occidental (NYSE:OXY), Pioneer Natural (NYSE:PXD), Talisman (NYSE:TLM), and Murphy Oil (NYSE:MUR). All are well-managed companies in an industry where it's cheaper to buy resources than to drill for them.

Of course, if Shell chooses to go a different route and become a diversified energy and mining conglomerate, no company is off the table. A massive oil company dwarfs even the biggest diversified miners. Any of our three portfolio holdings, BHP Billiton (NYSE:BHP), CVRD (NYSE:RIO), and Anglo American (AAUK) would be a great buy for an acquisitive oil company, with my nod going to AAUK.

So what does good ol' Uncle Vlad Putin have to do with accelerating my interest in buying some of these firms? Just last year, Russia bullied its way into a majority interest in the massive Sakhalin-2 oil and gas project that Shell used to legally hold a 55% interest in. Gazprom is the Russian Bear that now owns the majority interest. Shell's stake drops from 55% to 27.5%. Its two Japanese partners' stakes were cut in half, as well.

Shell "sold" their share of the $22 billion project for $7.45 billion. The alternative was to fight it out in the Russian courts -- while Russia threatened to sue for between $10 and $30 billion over "environmental concerns." Would this be the same Russia that raped Eastern Europe, ripped out its coal (leaving massive scars on the hills and valleys,) dumped toxic chemicals into the water, and created an air quality that makes LA look like Shangri-La? And they are suddenly concerned about the environment? Right! The environmental lawsuits were the gun Russia held to Shell's head while Gazprom picked its pockets. Now they'll forget all about their holier-than-thou "environmental concerns."

When completed, Sakhalin-2 will be one of the world's largest liquefied natural-gas export terminals -- conveniently close to a waiting Japanese, Chinese, and US West Coast energy market. The project holds an estimated 1 billion barrels of oil and 17 trillion cubic feet of natural gas. It "was" Shell's fourth-largest development project. With this larceny, Russia solidifies itself as the world's second-biggest oil exporter, behind only Saudi Arabia. All this means Shell will need to replace those reserves.

If you believe as I do, go for the biggest companies in the next level down -- Shell doesn't need incremental reserve enhancements. It wants big gains. If I had to guess, and it's just that, I'd say (and have purchased) COP, MUR, APC, CHK, and DVN. I believe these will be among the first in Shell's crosshairs.

Disclosure: Author is long RDS.A, CHK, APC, COP, MRO, DVN, COG, OXY, PXD, TLM, MUR, BHP, RIO and AAUK.

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