In the late 1990s and early 2000s - during a previous period of prolonged weakness in oil prices - there were a series of mega mergers in the sector. But though the collapse in crude this time round had led many to reheat old rumours about a combination between Shell and BP (BP.) whispers around BG had been less persistent. Pitched at a 50% premium to its 7 April close BG shares are up 37.9% to £12.55 – Shell itself is down 5.8% to £20.82. Either the market thinks it is overpaying or it is unsure on the strategic justification for the deal.
In a nutshell Shell's rationale is that the transaction will boost exposure to liquefied natural gas (LNG) and deepwater exploration (it will also increase reserves by 25% and production by 20%). It adds that the combined entity will, by divesting assets and streamlining operations, be able to allocate more capital to dividends and share buybacks.
It confirms its intention to pay its existing shareholders $1.88 per ordinary share in 2015. Shell also says it expects to commence a share buyback programme in 2017 of at least $25 billion. Shell's Ben van Buerden will be chief executive officer (CEO) of the enlarged group and BG's new CEO, Helge Lund, will leave.
RBC Capital Markets says its rough calculations imply the tie-up will dilute Shell's earnings by 10% in 2015 – requiring $1.6 billion worth of synergies to breakeven. Shell says the deal will be 'mildly accretive' to earnings in 2017 and 'strongly accretive' thereafter. RBC analyst Biraj Borkhataria says: 'In our view, the key attractions for Shell are BG's deepwater assets in Brazil and its LNG portfolio. BG's LNG portfolio combined with Shell's would represent roughly 16% of the global LNG market, further propelling Shell's position as a leader in this area.'
Westhouse notes the high price paid: 'Shell is paying a hefty $22 per barrel of oil equivalent (boe) of proved reserves and roughly $130,000 per barrel of oil equivalent per day of production, however, the acquisition is clearly a strategic move with Shell going after BG's Brazil deepwater and global LNG businesses.'