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Royal Dutch Shell set to acquire BG Group

08th April 2015

Royal Dutch Shell is in discussions with BG Group regarding a USD 70bn merger between the two oil and gas companies

Royal Dutch Shell is in discussions with BG Group regarding a possible USD 70bn merger between the two oil and gas companies
BG Group is the largest independent oil and gas explorer in Brazil's burgeoning deepwater plays

Royal Dutch Shell has taken advantage of a low equity price environment to boost its deepwater and LNG asset portfolio by taking over BG Group with a cash and share offer for its entire issued and to be issued share capital.

“This is an important transaction for Shell, accelerating the delivery of our strategy for shareholders. The result will be a more competitive, stronger company for both sets of shareholders in today’s volatile oil price world,” said Jorma Ollila, Shell chairman.

Shell would offer BG shareholders GBP 3.83 in cash per share in addition to 0.4454 Shell B shares. This would equate to a total deal value of approximately USD 70bn (GBP 47bn).

Shell believes the combination will be able to generate an additional USD 15 to 20bn annual cash flow for the merged company.

Volatile oil prices has depressed the equity values of companies in the oil and gas sector, causing a flurry of merger and acquisition moves.

This is the largest major oil and gas producer merger since the early 2000s.

BG has an attractive portfolio of deepwater and LNG assets, mainly in Brazil and Western Australia, which Shell plans to accelerate the development. This would add 25 per cent to Shell’s proven oil and gas reserves, and 20 per cent to its producing assets.

“Bold, strategic moves shape our industry,” said Ben van Beurden, CEO of Shell. “BG and Shell are a great fit. This transaction fits with our strategy and our read on the industry landscape around us. At the start of 2014, Shell embarked on an improvement programme, including divestments and the restructuring of underperforming businesses, whilst at the same time delivering profitable new projects for shareholders.

“This programme is delivering, at the bottom line. BG will accelerate Shell’s financial growth strategy, particularly in deep water and liquefied natural gas: two of Shell's growth priorities and areas where the company is already one of the industry leaders. Furthermore, the addition of BG's competitive natural gas positions makes strategic sense, ahead of the long-term growth in demand we see for this cleaner-burning fuel.

“This transaction will be a springboard for a faster rate of portfolio change, particularly in exploration and other long term plays. We will be concentrating on fewer themes, and at a larger scale, to drive profitability and balance risk, and unlock more value from the combined portfolios. Over time, the combination will enhance our free cash flow potential, and our capacity to undertake share buybacks, where I expect to see a substantial increase in pace.”

BG has recently been blighted at its deepwater operations off Brazil by its scandal-riddled working partner Petrobras, lowering the value of its assets.

Shell believes that these additions to its portfolio will boost its long-term production strategy.

“Given the low oil price, this deal is likely to be the first rather than the last substantial M&A transaction in the sector this year,” comments Philip Barker, partner at Cavendish Corporate Finance.

“The last low oil price period in the 1990s produced a far-reaching corporate restructuring and the emergence of companies such as BP, Chevron and ExxonMobil. This deal could signal the start of a spate of further mega deals and a similarly sweeping re-ordering of the international oil and gas industry.”

At the time of publishing, the announcement has caused a 340.10 pence (37.36 per cent) rise in BG shares, and a 125.00 pence (5.66 per cent) drop in the value of Shell shares.

"A takeover of BG by one of the UK supermajors has obviously long been rumoured, but was previously seen as too expensive," commented Kim Fustier, analyst at Edison Investment Research. "Shell's timing here appears sound as the lower oil price environment, BG's operational disappointments of the last 2-3 years and uncertainties over Petrobras have made a BG acquisition significantly more attractive.”

 

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