In response to growing militant activities and a souring of relations with the government, Royal Dutch Shell (RDSA) is planning to divest oil fields in Nigeria worth up to $5 billion. The Nigerian Government prepares to impose harsher terms on foreign operators and hand a greater control to domestic companies.

Shell is the biggest and the longest standing foreign oil producer in Nigeria. A significant portion (approximately 16%) of the company’s total 2008 oil production came from Nigeria. Shell has switched its investment focus from Nigeria to other places, particularly to Iraq and the Gulf of Mexico (GoM). It intends to invest $10 billion over the next 20 years to develop Iraq’s massive Majnoon oil field.

This apart, in the last month, Shell had designed a development plan in the GoM for West Boreas discovery, which may hold 100 million barrels of resources.

Production has been in a downtrend for the last few years. Last year, the company’s production declined approximately 2%. Shell does not compare favorably with its peers in terms of upstream growth prospects.

We believe Shell’s decision of Nigerian assets divestiture and shift of focus to other potential areas is the right step towards its upstream growth expansion. However, it is too early to say about the impact on the bottom line. We think that Shell ADRs are adequately valued and offer limited upside from current levels. As such, we recommend a Neutral rating for Shell.

Zacks Investment Research

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