Shell Will Buy BG Group for $70 Billion in Cash, Shares
Comment of the Day

April 08 2015

Commentary by David Fuller

Shell Will Buy BG Group for $70 Billion in Cash, Shares

Here is the opening of this topical article from Bloomberg:

Shell, which helped pioneer the process of liquefying gas for shipment aboard tankers decades ago, and rivals such as Chevron are betting LNG will play an increasing role in emerging economies seeking alternatives to dirtier energy sources such as coal.

The fundamental logic of a merger “always existed, what has happened in the last month is that it has become very compelling from a value perspective,” Van Beurden said on a conference call on Wednesday.

The new company will be the largest producer of LNG among international oil companies and gas is a “very important” component of the deal, he said.

Buying BG also brings Shell a share in Brazil’s largest deepwater fields, consolidates its position in Australia’s gas industry and allow more participation in the U.S.’s emergence as a LNG exporter.

Shell will pay 383 pence in cash and 0.4454 of its B shares for each BG share, the companies said on Wednesday. That’s equal to about 1,367 pence a share, valuing BG at about 47 billion pounds, a premium of about 50 percent on BG’s closing share price yesterday.

To win over shareholders, Shell pledged cost savings of $2.5 billion, asset disposals of at least $30 billion within four years and a giant share buyback of $25 billion from 2017 to 2020.

David Fuller's view

This is a bold and also controversial move by Shell.  Bold because Shell is betting its future on natural gas and wants to be the biggest player in this sector.  Controversial because Shell is paying a hefty price for BG, presumably because it has confidence in the takeover candidate’s portfolio and is also hoping to deter rival bids from American companies, which have the benefit of a stronger currency. 

I am not an uninvolved observer, as you probably know, but the bet on natural gas is sound, in my view, despite inroads from solar energy and other renewables, which will only increase in my opinion.  Natural gas is on its way to becoming the most widely used fossil fuel because it is cleaner than crude oil or gasoline, not to mention coal. 

Will the merger get past the ever present antitrust regulatory agencies in Australia, Brazil, China, the EU and USA?  I hope so but one can never be sure about regulators. 

Can Royal Dutch Shell maintain its dividend?  For a while but it will need some luck over the next couple of years, in the form of higher prices for crude oil and natural gas.  This is certainly possible but it is not a near-term prospect, in my opinion.  

(See also: Will Royal Dutch Shell Cut Its Dividend?)  

(See also: Shell Makes a Promising Move)

(See also: If History Is Any Guide, Big Deals Signal the Oil Market Is Bottoming)

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