Shell to buy Canada's Duvernay Oil for C$5.9 bln

By Tom Bergin and Scott Haggett

LONDON/CALGARY (Reuters) - Royal Dutch Shell Plc (RDSa.L) has agreed to buy Canada's Duvernay Oil Corp DDV.TO for around C$5.9 billion ($5.9 billion) to boost the major's production from prolific unconventional gas holdings.

Shell and Duvernay said on Monday that Shell has made a cash offer of C$83 a share, 42 percent above Duvernay's Friday closing price of C$58.44 on the Toronto Stock Exchange. The offer was unanimously accepted by Duvernay's board.

Duvernay has 1,800 square kilometers (450,000 acres) of land holdings in two Canadian provinces, particularly in the prized Montney region in the northeast of British Columbia and in Alberta's Deep Basin, areas Shell hopes to add to its portfolio of tight gas interests.

"We weren't looking to sell but they approached us," said Mike Rose, Duvernay's chief executive. "Shell was very interested in the assets we've built up."

Tight gas is gas contained in difficult reservoirs, where extraction was once considered too costly. However, high gas prices and advances in technology have led to a surge of investment in such reserves, which are sometimes massive, and Duvernay has one of the best holdings of the resource among mid-sized Canadian companies.

"Duvernay has an unmatched position in terms of leverage to (natural gas) resources," said Robert Fitzmartyn, an analyst at FirstEnergy Capital.

Companies are investing heavily in tight gas areas such as the Barnett Shales in Texas or the Horn River formation in the northeastern British Columbia, where EnCana Corp (ECA.TO), EOG Resources Inc (EOG.N) and Nexen Inc (NXY.TO) have detailed potential natural gas resources trillions of cubic feet in size.

Indeed, Duvernay has said that its Deep Basin and Montney holdings could each eventually produce more than 200 million cubic feet of natural gas a day and have potential reserves of more than 1 trillion cubic feet.

"Shell has a proven track record in North America tight gas activities. Duvernay could become a valuable part of the Shell portfolio," Shell Chief Executive Jeroen van der Veer said in a statement.

The offer is Shell's first major Canadian deal since last year, when the global major bought out the minority shareholders in its Shell Canada Ltd unit for C$8.7 billion.

The Duvernay offer is particularly notable because the company has been concentrating on expanding in the oil sands region of northern Alberta, where it's the No. 3 producer in the region, which has the largest oil reserves outside the Middle East.

Shell's offer is conditional on its gaining at least 66-2/3 percent of Duvernay's outstanding common shares. Duvernay directors have committed to selling their own shares, representing 18.1 percent of the company.

Duvernay has reported more than 25,000 barrels of oil equivalent per day (boepd) of production, predominantly in natural gas, with plans to increase production to around 70,000 boepd by 2012, Shell said.

Duvernay's yearend proved and probable reserves were 3.8 million barrels of oil and 663 million cubic feet of natural gas, a figure that doesn't include its tight gas holdings.

Chad Friess, an analyst at UBS Securities, said in a note to clients that Duvernay's tight gas properties may hold as much as 6.1 trillion cubic feet of gas.