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Why Is Shell Selling Assets in Nigeria?

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Royal Dutch Shell (NYSE: RDS-A  ) hasn't had the best experience in Nigeria, where oil spills, theft, and vandalism have cost the company as much as 100,000 barrels of oil per day in lost production.

To rectify the situation, the company is conducting a strategic review of its Nigeria business and recently put four oil blocks in the troubled Niger Delta region of the country up for sale, Reuters reported. Given that the blocks had a combined output last year of 70,000 barrels a day of oil and natural gas liquids, or almost 10% of Shell's production in Nigeria, is this the right move for the company?

Strategic review of Nigerian operations
Shell's decision to part with these four onshore blocks reflects the company's determination to fight the scourge of oil theft and vandalism that has long plagued its operations in Nigeria. As part of its ongoing strategic review of its business in the country, the oil major hopes to narrow its operating footprint in the region by reducing its exposure to the more sabotage-prone Niger Delta region.

Shell's not the only company overhauling its operations in the West African nation. Last year, Total (NYSE: TOT  ) sold a 20% stake in an offshore field to China's Sinopec, while ConocoPhillips (NYSE: COP  ) agreed to sell all its Nigerian assets to Toronto-listed Oando Energy Resources for roughly $1.79 billion in cash. Meanwhile, Chevron (NYSE: CVX  ) is currently reviewing bids for three of its oil blocks in the Niger Delta.

Additional asset sales
Shell's recent moves highlight a company that is determined to rectify its struggling operations. Not only is it carefully reviewing its remaining oil and gas leases in Nigeria, but its also overhauling its North American exploration and production business, which reported a loss in the second quarter and is expected to remain unprofitable for the remainder of the year.

It recently put up for sale 106,000 leasehold acres in the Eagle Ford shale of Texas, as well as 600,000 acres in Kansas' Mississippi Lime play and its interest in a shale oil research project in Colorado. I believe divesting these less profitable assets is the right move because it will allow the company to focus on more lucrative, higher-margin opportunities elsewhere.

The bottom line
All told, I think Shell is on the right track with these asset sales. Having already divested roughly $21 billion worth of assets over the past three years, its underlying business is now stronger and much more streamlined. Over the next year and a half, it plans to start up more than a dozen new projects, such as Mars-B and Cardamom in the Gulf of Mexico, which should generate plenty of cash flow to help sustain its massive capital spending program.

Shell's leading position in natural gas is another competitive advantage that bodes well for the company's longer-term future. Along with ExxonMobil (NYSE: XOM  ) , which made a huge bet on the future of natural gas when it purchased XTO Energy for $41 billion back in 2010, Shell is highly optimistic about the future of natural gas and expects global demand for LNG to double by 2025.

It has already invested some $40 billion into LNG production facilities, storage terminals, and related facilities and has other LNG projects that are either already up and running or under construction in seven countries. These projects are characterized by highly stable revenues and should continue to generate strong and stable cash flows for decades into the future, giving the company ample room to return more cash to shareholders.

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