Commentary on the Shell BG deal

Royal Dutch Shell has agreed to buy British oil and gas exploration firm BG Group in a deal that values the business at £47 billion.

The two majors say they have reached agreement on a cash and shares offer which gives investors a 50% premium on BG Group's share price on 7 April.

The deal could be one of the biggest of 2015 and could produce a company with a value of more than £200 billion (US$296 billion).

As it announced the takeover bid, Shell said it expected to make asset sales totalling US $30 billion between 2016 and 2018, although it did not specify which assets it was reviewing for sale.

Wood Mackenzie

"First mover advantage secures Shell industry leading positions in deepwater oil and LNG," says Tom Ellacott, Vice President of Corporate Analysis for Wood Mackenzie, reacting to the Shell BG deal.

The deal centres on two growth resource themes:

A real prize for Shell is the oil in deepwater Brazil

By 2025 Brazil will be delivering 550 000 bpd of oil; 13% of BG/Shell’s total production and the biggest single country position in the combined portfolio. Breakeven prices for the main assets rank alongside the best tight oil plays. Deepwater leadership will be firmly established, with Shell having 50% more value locked up in the deepwater sector than second placed peer BP once the deal closes. 

An LNG behemoth emerges

The combined entity will control sales of 44 million tpy of LNG by 2018, making it the largest LNG seller globally. Shell will have unrivalled flexibility and exposure to virtually every major LNG supply source and market, providing significant scope for portfolio optimisation. The move re-energises Shell's LNG development pipeline, adding a leading US position, entry to East Africa, and new options to expand in Australia and Canada.

Rystad Energy

European super major Royal Dutch Shell offers US$69.7 billion to take over rival BG Group to strengthen its footprint on global LNG and integrated gas. This implies a 50% premium to pre-deal stock prices. The new Enterprise Value of BG is now at US$70 billion, still lower than the fundamental valuation in Rystad Energy’s upstream database UCube, which has set a price tag at US$77 billion for the group’s upstream activities, assuming US$105/bbl Brent in 2020 and 10% required return. The full Transaction Value is US$82 billion including net debt.

Rystad Energy’s valuation indicates half of the value is driven by Brazil pre-salt where BG has been a close partner with Petrobras since BG discovered the supergiant Lula field in 2006. The value of the Brazil portfolio is 50% driven by projects not yet sanctioned. US$20 billion of the valuation comes from Australia coal seam LNG projects, where more than 2/3 of the value is not yet sanctioned.

Edison Investment Research

“The proposed Shell-BG combination makes good strategic sense given the overlap in the two majors' portfolios, notably in global LNG, Australia and Brazil among others, which enhances the potential for meaningful operational and cost synergies. In addition, the deal provides Shell entry into plays it has long been interested in, such as East Africa, Tanzania,” Kim Fustier, Analyst at Edison Investment Research, said.

“The relative concentration of BG's upstream asset portfolio in a handful of key countries relative to a US/EU supermajor portfolio should make post-merger integration somewhat easier. The combined Shell-BG entity should also have greater scope to divest tail-end and underperforming assets.

A takeover of BG by one of the UK supermajors has obviously long been rumoured, but was previously seen as too expensive. 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.”

Investec

Key takeaways from Shell’s bid

Why is BG selling itself? We suspect that BG Chairman Andrew Gould has, over the past year or so, come to regard BG as a company with a decent asset base but lacking the financial clout (and, arguably, the technical expertise) to develop its resources in an optimal manner. Furthermore, the fall in the oil price, BG’s higher than average level of gearing plus the potential fallout from the Petrobras corruption scandal have likely persuaded him that the company was better off in the hands of a rival with deeper pockets.

Rationale for the deal Shell’s asset fit with BG was always fairly obvious. BG give s Shell a step-change in terms of its growth priorities – more deepwater and LNG – and should act as a catalyst to reshape (‘highgrade’) the combined portfolio. Although Shell’s downstream divisions (R&M and Chemicals) become a smaller part of the combined group, Shell emphasised that it still believe s in the integrated model, i.e. there will be no demerger down the line.

In terms of LNG, while BG was always an attractive target, we suspect it was the successful integration of Repsol’s LNG assets in 2014 which served as a taster and gave Shell more confidence to add BG’s larger supply and trading portfolio. Repsol’s LNG assets added US$1 billion of cash flow, or 8% , to Shell’s Integrated Gas division in 2014. Shell insists that the scale of this increased portfolio will work to its advantage – it would have 45 million tpy of supply in 2018, or twice the next largest player (ExxonMobil).

But why not buy a big US shale producer?

Shell’s CEO noted that the company already has around US$ 24 billion of shale capital employed on its balance sheet, much of which is not yet in production. So he didn’t want to ‘double down’ by buying a large US shale player. The emphasis is clearly on reinforcing two of Shell’s core areas (deepwater and LNG). However, despite Shell’s disposal ambitions, it remains to be seen exactly how focused the portfolio will become over the medium-term. (The moniker ‘small but beautifully formed’ rarely applies to Shell.)

 

Edited from various sources by Cecilia Rehn

Sources

Wood Mackenzie

Rystad Energy

Investec

Published on 10/04/2015


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