Shell: Time for an exit

Shell Refining Co (FOM) Bhd ("Shell") has announced recently that it is deliberating on the strategic option (here). To wit:

One thing remains certain: Continuing to operate the business as it is today is not a long-term option. The current refining margins was positively influenced by the lag in product pricing adjusting to crude pricing levels and delays in startup and stabilisation of new refining capacity in the region. Refinery margins remain uncertain and will be influenced by international supply and demand for petroleum products, and seasonal and cyclical factors,” explained Lo.

The company’s Board also cited its heavy debt load, the significant investment required to meet Euro 4 and Euro 5 compliance standards, as well as the challenged outlook of refining margins, as factors influencing its view that continuing the company in its current form is not a viable option.

Assuming that Shell decides to discontinue its refining operation, it is likely that the parent company, Shell Overseas Holdings Ltd (a part of the Royal Dutch Shell plc) will dispose of its 51%-stake in the company. How much will the share fetch?

To answer that question, let's look back at the selling price that ExxonMobil International Holdings Inc got for its 65%-stake in Malaysia-listed Esso Malaysia Bhd ("EssoM") in 2012. As both Esso and Shell are majority controlled by their foreign parent companies, the sale of their controlling stake would result in a General Offer and minority shareholders would be getting the same price as the majority shareholder.

In 2012, San Miguel bought the 65%-stake in EssoM for RM3.59  per share or at a small 9.79% premium over the book value. Assuming Shell also managed to get a similar premium, then the share will command a price of RM1.19 each.


Table: Esso & Shell's NTA & Actual & Estimated Selling Price

You may argue that Shell may secure a better price by selling the business and the listing vehicle separately. This being a part of Royal Dutch Shell, one of the largest companies in the world, I doubt they will try and squeeze out an extra RM50 million for this "small" unit. They will probably work hard to get the strategic decision right and then proceed with a clean & quick exit. This is why the share prices of Shell started dropping again after the announcement mentioned.

From the chart below, we can see that Shell broke its horizontal line at RM4.70 last week.


Chart: Shell's weekly chart as at Jul 7, 2015 (Source: ShareInvestor,com)

Based on the above analysis, it is recommended that you exit your position in this stock. Earlier recommendation is not no longer applicable. Any losses arising from that recommendation is much regretted.

Note:
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest inthe acquisition or disposal of, Shell.