Oil and gas experts give their verdicts on what this deal means for the industry, energy markets and business in general
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.
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.
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.
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.
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.
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 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 c40mtpa [circa 40 million tonnes per annum] or roughly 16% of the global LNG market, further propelling Shell’s position as a leader in this area. In addition, Shell would acquire significant growth options including Tanzania and Lake Charles LNG. In Brazil, BG’s assets would give Shell a further foothold in one of the lowest cost basins in the world, and could add potential synergies with Shell’s Libra assets.
This morning’s news … has given the beleaguered oil and gas sector a much needed shot in the arm after 18 months of significant underperformance.
While the size of the deal is certainly noteworthy, it’s the second biggest deal of its kind, behind the 1998 Exxon Mobil tie up, it also speaks to the damage the sharp decline in the oil price has done to a number of big oil players in the last few months, making the sector ripe for consolidation.