Royal Dutch Shell: BG deal can work with oil at $50 for 2 years

Royal Dutch Shell has told investors its purchase of BG can work even if oil prices average $50 a barrel for two years, its lowest estimate yet as it seeks to secure shareholder support for the $51bn (€46.6bn) deal amid plunging crude markets.

The Anglo-Dutch group is confident investors will back the deal at a January 27 meeting, even though crude prices are languishing near 12-year lows around $32 a barrel and it faces a cut to its credit ratings due to higher debts, sources with knowledge of its meetings with analysts and investors said.

When Shell announced the deal in April 2015, with oil trading around $55 a barrel, many investors saw it as a bold move to buy a weakened rival on the expectation that prices would recover to around $90 per barrel within three years.

Initially, Shell indicated the combined group would be profitable with prices in the mid $70 a barrel.

Last month, it said the merger would work in the low $60s.

On Wednesday, finance chief Simon Henry told analysts Shell had conducted stress tests that showed it could withstand oil at $50 a barrel over the next two years, the sources told Reuters.

A Reuters poll on Monday showed analysts expect benchmark North Sea Brent crude futures to average $52.52 a barrel this year.

To weather such an environment, Shell plans to cut capital spending further below the planned $35bn for 2016, delay share buybacks, and extend scrip dividends (shares instead of cash).

Shell shares fell 2.9% yesterday, having slumped more than 30% since the deal was announced on April 8, trailing most of its peers.