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Out of its Shell

8 April 2015 By Fiona Maharg-Bravo

Royal Dutch Shell sat out previous waves of energy consolidation. Now the Anglo-Dutch major has struck the first megadeal of the latest oil rout. Paying $70 billion for smaller, gas-focused rival BG looks like a smart and opportunistic way to boost growth.

Shell admits eyeing BG for years. The deal looks well-timed: a series of profit warnings and management changes made BG vulnerable, with new Chief Executive Helge Lund only taking over in February.

At first glance, though, this looks better value for BG shareholders. A fat 50 percent premium equates to a total mark-up of nearly $23 billion. That outstrips planned annual savings of $2.5 billion: taxed at BG’s 37 percent rate and capitalised at 10 times, these would have a net present value of closer to $16 billion.

However, there may be plenty of extra savings that Shell has not quantified yet. And BG’s depressed share price might overstate the real premium – the stock has plunged 28 percent in the last nine months.

Moreover, the strategic argument is compelling. BG will boost Shell in two complementary areas: Brazilian deepwater assets and liquid natural gas. Shell, which has a lacklustre reserve-replacement ratio compared to peers, will see production lifted 20 percent.

As ever with megadeals, much depends on execution and keeping costs down. Given BG’s recent troubles, this may not be straightforward, although the company’s capital commitments are falling as it completes large projects.

There is also an in-built optimism behind Shell’s move. BG will add to cash from operations in 2016 and will be strongly accretive to earnings per share from 2018, Shell says. But it is assuming that by then Brent crude has recovered to $90 a barrel, some 50 percent higher than today’s price. If it doesn’t, Shell will need to find a sharper axe.


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