Shell to buy smaller rival BG for €65bn

Royal Dutch Shell has agreed to buy smaller rival BG Group for £47bn (€65bn) in the first major energy industry merger in more than a decade, closing the gap on market leader ExxonMobil after a plunge in prices.

Anglo-Dutch Shell will pay a mix of cash and shares that values each BG share at around 1,350p, the companies said. This is a hefty premium of around 52% to the 90-day trading average for BG, setting the bar high for any potential counter-bid by a company like Exxon, which has said it would also use the oil markets downturn to expand.

The third-biggest oil and gas deal ever, by enterprise value, will bring Shell assets in Brazil, East Africa, Australia, Kazakhstan and Egypt, including some of the world’s most ambitious liquefied natural gas (LNG) projects.

Shell is already the world’s leading LNG company and it would get BG’s capacity in LNG logistics — complex infrastructure that includes terminals, pipelines, specialised tankers, rigs, super coolers, regasification facilities and storage points.

“We are seeing a gasification of energy demand. Shell clearly recognises this,” said Richard Gorry, director at JBC Energy Asia. “That said, Shell is still taking a big gamble because if the price of oil and gas doesn’t go back up (in the next 24 months), I would imagine this might put them in a difficult position in terms of cash flow.”

Stitched together by Shell CEO Ben van Beurden and BG chairman Andrew Gould, the tie-up comes after oil prices halved since last June, putting a premium on access to proven assets rather than costly exploration. Record low interest rates made it easy to raise cheap funding for big corporate deals.

“We have been scanning quite a few opportunities, with BG always being at the top of the list of the prospects to combine with,” Shell’s Van Beurden told a conference call. “We have two very strong portfolios combining globally in deep water and integrated gas”.

Britain’s BG had a market capitalisation of $46bn as of Tuesday’s market close, Shell was worth $202bn while Exxon, the world’s largest energy company by market value, was worth $360bn.

With BG, Shell would be the leading foreign oil company in Brazil. Analysts at investment bank Jefferies said they now expected Shell to surpass Exxon as the world’s largest publicly traded oil and gas producer by 2018, with output of 4.2 million barrels of oil equivalent per day.

Global LNG production last year came to 246 million tones per annum. The new Shell-BG group would have 18%of global LNG production.

Van Beurden said the presence of two large players in Australia, Brazil and China and the European Union might require a detailed conversation with anti-trust authorities, but was unlikely to lead to forced asset sales.

Reuters