Wednesday, April 08, 2015

BG Group’s been ‘Shell-ed’

In case you have been away from this ‘crude' planet and haven’t heard, oil major Royal Dutch Shell has successfully bid for its smaller FTSE 100 rival BG Group in a cash and shares deal valuing the latter at around £47 billion (US$70 billion).

While it’s early days into the current calendar year, the deal, subject to approval by shareholders, could be one of the biggest of 2015 producing a company with a combined value of over £200 billion.

For the Anglo-Dutch oil major, BG Group's acquisition would also add 25% to its proven oil and gas reserves and 20% to production capacity, along with improved access to Australian and Brazilian prospects. BG Group shareholders will own around 19% of the combined group following the deal.

BG Group's new chief executive Helge Lund, who only took up the post last month, will remain with the company while the deal is being worked on. However, he is expected to leave once it is completed walking away with what many in the City reckon to be a £25 million golden goodbye. The Oilholic thinks that’s not too bad a deal for what would come to little over three months of service.

BG Group shareholders, who’ve had to contend with a lacklustre share price for the last 12 months given the company’s poor performance, can also expect a decent windfall should they choose to sell. The bid values BG at around 1,350p per share; a near 50% premium to its closing price of 910.4p on Tuesday. If they decide to hold on to their shares, they’d be likely to receive an improved "Shell of a dividend" from a company that has never failed to pay one since 1945.

Shell chief executive Ben van Beurden said, "Bold, strategic moves shape our industry. BG and Shell are a great fit. This transaction fits with our strategy and our read on the industry landscape around us."

The market gave the news a firm thumbs up. Investec analyst Neill Morton said BG’s long-suffering shareholders have finally received a compelling, NAV-based offer while Shell’s bid was arguably “20 years” in the making.

“We agree that BG’s asset base is better suited to a larger company, but the economics require something approaching Shell’s $90/bl assumption. Consequently, we do not expect a rival bid and are wary of this catalysing a flurry of copycat deals. But we are also mindful that investment bankers can be very persuasive! We suspect Shell aims to re-balance dividends versus buybacks over the long-term. This could imply lower dividend growth,” he added.

As for the ratings agencies, given that the deal completion is scheduled for H1 2016, and quite possibly earlier given limited regulatory hurdles, Fitch Ratings placed Shell's ratings on Rating Watch Negative (RWN) and BG Group's ratings on Rating Watch Positive (RWP).

The agency aims to resolve the Rating Watches on both companies pending the successful completion of the potential transaction and “once there is greater clarity with regard to Shell's post-acquisition strategy and potential synergy effects.” We’re all waiting to hear that, although of course, as Fitch notes – Shell's leverage will increase.

“Our current forecasts suggest that the company's funds from operations (FFO) adjusted net leverage will increase from 1.5x at end-2014 to around 2x in 2015-2017 based on conservative assumptions around the announced $30 billion divestment programme and execution of the announced share buybacks from 2017.”

Moody’s has also affirmed its Aa1 rating for Shell, but quite like its peers changed the company’s outlook to negative in the interim period pending the completion of the takeover. Meanwhile, some City commentators have speculated that Shell's move might trigger a wave of M&A activity in the oil and gas sector.

However, the Oilholic remains sceptical about such a rise in M&A. In fact, one is rather relieved that the Shell and BG Group saga would cool nonsensical chatter about a possible BP and Shell merger (oh well...there's always ExxonMobil).

They’d be the odd buyout or two of smaller AiM-quoted independents, but bulk of the activity is likely to remain limited to asset and acreage purchases. Of course, consolidation within the sector remains a possibility, but we are too early into a cyclical downturn in the oil market for there to be aggressive overtures or panic buying. However, 2016 could be a different matter if, as expected, the oil price stays low.

Moving away from the Shell and BG show, here is one’s take via a Forbes column on how oil markets should price in the Iran factor, following the conclusion of pre-Easter nuclear talks between the Iranians and five permanent members of UN Security Council plus Germany.

Additionally, here’s another one of the Oilholic’s Forbes posts on why a decline in US shale activity is not clear cut. As it transpires, many shale producers are just as adept at coping with a lower oil price as any in the conventional industry. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: Vintage Shell petrol pump, San Francisco, USA © Gaurav Sharma

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