Shell has agreed a £47bn offer for BG Group, the UK’s third-largest energy company, which was created in 1997 when British Gas split into BG and Centrica.
Here is what analysts made of the deal, which will create an oil and gas business worth more than £200bn. Several believe this could spark a deal frenzy.
Matthew Beesley, head of global equities at Henderson Global Investors
Shell’s agreed purchased of BG Group (not to be confused with British Gas, owned by the utility company Centrica), is important for all UK pension savers. Prior to today’s announcement, Shell accounted for nearly 10% of UK related dividend income. The purchase of their rival BG, will increase this to nearer 11%. But so what?
Well in making this acquisition, Shell will be taking on a portfolio of potentially riskier assets. BG shares had fallen by nearly a third in the last year prior to today’s announcement, as the company’s exposure to a series of troubled projects in Brazil and costs associated with the launch of a new Liquefied Natural Gas (LNG) project in Australia weighed on the shares.
Shell is taking on more risk in issuing more shares and also in paying out cash to BG shareholders. As a result their balance sheet will become more stretched. And this potentially puts some strain on this dividend as they redirect cashflows to paying down debt ahead of growing the dividend.
The company has emphasised that this year’s dividend will be unchanged and that it could grow in 2016, but for UK pension investors, we need to be aware that 17% of UK FTSE All Share income is oil and gas related.
We think Shell’s acquisition of BG will likely be viewed as strategically smart and opportune, but should oil prices stay lower for longer, while it will be good for the UK consumer, it could put pressure on UK dividends and be detrimental to UK pension investors.
Michael Clark, portfolio manager of the Fidelity MoneyBuilder Dividend Fund
The acquisition of BG by Shell has occurred for two main reasons. First, although BG had some first-class assets, it has struggled to develop them as smoothly as hoped in recent years. Shell has a wider pool of expertise and substantially greater access to investment capital. Second, this gives Shell a presence in the productive zone off the coast of Brazil, and will ensure that Shell’s own production is maintained over the medium term, taking away the requirement to make large discoveries to offset natural depletion. It’s a good deal for BG shareholders, clearly, but also good for shareholders in Royal Dutch Shell. There is no danger Shell will change its dividend policy.
Pascal Menges, manager of the Lombard Odier Global Energy Fund
This shows that big oil’s growth strategy over the last 10 years is bust. Having bet enormous sums on eye-wateringly expensive oil production from oil sands, ultra-deep water and arctic fields, the supermajors are now ill-placed to cope with a low oil price.
What next? Shell’s purchase of BG Group heralds a scramble by big oil to “high-grade” – improve the overall quality of – their portfolios. It didn’t have to be this way. Low oil prices in the early 2000s offered a window to pick up quality reserves and production at depressed prices. Instead they sat on their hands and waited until later in the decade to embark on pricey investments in new oil sources.
With BG Group, Shell gets exposure to Brazil’s vast Santos basin reserves, and further involvement in the integrated gas (LNG) market. But it comes at a hefty price. Management will have their work cut out to execute the deal and generate synergies and assets sales. The risk of indigestion is not small.
Will other oil majors take the same route? They’d certainly like to high grade their portfolios. Only Exxon has the flexibility to do big ticket deals like BG Group. In contrast, Total, ENI and Statoil will have to content themselves with the pick ‘n’ mix counter.
Marc Kimsey, senior trader at Accendo Markets
The deal between Royal Dutch Shell and BG Group will prompt sector consolidation. The decline in oil price over the past year has battered some stocks, which are clearly now looking attractive.
In the last year BG shares fell 30%, shares in Tullow Oil have fallen 65%, Premier Oil down 55%, and Petrofac down 20%. By comparison, sector behemoths BP and Royal Dutch Shell have only shed 10% over the same period, leaving them in the position of predator rather than prey.
Richard Hunter, head of equities at Hargreaves Lansdown stockbrokers
Whether precipitated by the falling oil price or BG’s more recent production woes, Shell has acted opportunistically, as it previously implied it might if the occasion arose.
Already the largest FTSE 100 constituent by a considerable margin, this deal will further consolidate Shell’s position in that regard. There are clear attractions from Shell’s viewpoint, including its additional exposure to liquified natural gas, almost immediate cost synergies and, in due course, asset sales from a partial break up of BG’s operations.
The projected price being paid for BG does not quite match the company’s previous high of 1551p in March 2011, since when the shares have fallen 41%, 20% of which is in the last year alone. Nonetheless, the combined cash-and-shares offer will not, it would appear, dilute the cash-generative abilities of the combined entity, with a substantial share buyback programme pencilled in for 2017 and beyond.