Will Royal Dutch Shell Plc Acquire One Of These Smaller Producers?

It’s no secret that Royal Dutch Shell (LSE: RDSB) is struggling to grow. So, many analysts have begun to speculate that the company, rather than trying to grow organically, will acquire some of its smaller peers to jump-start growth

Currently in the process of divesting upto $15bn worth of non-core assets, Shell has an impressive war chest with which to fund acquisitions, and there are two companies in particular that Shell’s management could be eying up. 

The best record
royal dutch shell

An obvious target for Shell would be FTSE 100 peer, Tullow Oil (LSE: TLW). Tullow is no stranger to takeover speculation and it was widely believed that Norwegian oil major, Statoil was going to pounce on Tullow at beginning of this year.

Unfortunately, a bid from Statoil never emerged but Tullow continued to do what it does best: find oil.

Tullow’s record of successfully finding oil reserves is easily one of the best in the world and investors have been keen to buy into the company’s success.  

However, after a string of disappointing well results this year, Tullow’s share price has come under pressure. Nevertheless, a falling share price only makes the company more attractive for a potential acquirer like Shell, so it’s likely that Tullow’s recent underperformance is not going unnoticed.

What’s more, poor performance at the drill bit is not reflective of Tullow’s portfolio of highly prospective assets, described as “world class” by several City analysts. 

Lacking exposure

One of the regions where Shell lacks exposure, compared to its peers, is Iraq. With this in mind, Shell could be eager to gain exposure to the region by making a bid for Genel Energy (LSE: GENL).

Managed by ex-BP CEO Tony Hayward, Genel is currently laying the foundations for future growth, as well as diversifying away from Iraq.

Genel is targeting production from its oil prospects within Iraq of 60,000 to 70,000 barrels this year, up 30% from 2013.

Additionally, Genel currently has $600m of cash on its balance sheet and with the opening of a new pipeline this year, the company will be able to transport its oil out of Iraq into the international market. Access to the international market means that Genel will be able to sell its oil at the international Brent benchmark.

Previously, Genel has been forced to sell its oil at a discounted price within domestic markets. Current forecasts estimate that selling to the international market will allow Genel to boost profits by 40%.

But Genel is not just confined to Iraq. The company has been seeking to diversify and has prospects off Africa; management are predicting that the company will double output during the next few years.

Foolish summary

So all in all, Shell is struggling to grow organically and many analysts have started to speculate that the company will hit the acquisition trail to boost growth.

Tullow and Genel look to be attractive targets for Shell. On one hand, Tullow is a world-class exploration company, which has fallen on hard times and now looks attractively priced. Genel, on the other hand, is ramping up production and has exposure to the highly prized Kurdistan oil fields.

Risky business

Nevertheless, speculating on mergers within the oil and gas sector is a risky business.

That's why the best investors build a portfolio with a combination of both risky oil companies and reliable dividend paying stocks, just like Royal Dutch Shell, which has a dividend history stretching back to the Second World War.

With the dividends flowing in, you can reduce risk and sleep soundly at night.

To help you build your dividend portfolio, the Motley Fool's top analysts have put together this free report revealing the secrets on how you can "Create Dividends For Life".

Just click here to download the report for free today!

Rupert does not own any share mentioned within this article. The Motley Fool has recommended shares in Tullow Oil.