Shell £47bn BG deal will stretch balance sheet but should pay off says Henderson

8th April 2015

Royal Dutch Shell has agreed to buy BG Group for £47bn, in the biggest oil and gas deal for 17 years. Here the experts share their views on what this huge takeover news means for investors….

Matthew Beesley, head of global equities at Henderson Global Investors, says: “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 (or LNG) project in Australia weighed on the shares. As owners of BG, we have long believed that investors were placing too much emphasis on some of these shorter-term issues and failing to fully understand the longer-term potential of these assets. Our fair value for the stock was around £13-14 which is roughly the price at which the shares are being acquired by Shell, but the significant fall in the oil price had reduced the perceived value of these key assets. In buying BG, Shell is making a bold strategic bet that oil prices will recover towards the $70-90 level in the medium term.

“In the interim, Shell is taking on more risk and 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.

” The downturn in oil prices has come after a collapse in many metal prices last year too: Large mining companies are another 7-8% of UK dividends. We all need to be mindful that a large chunk of our pension assets’ in the UK are tied to these Natural Resources sectors.

“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.”

Pascal Menges, manager of the Lombard Odier Global Energy Fund, says: “This shows that Big Oil’s growth strategy over the last ten 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 scrabble 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.”

Ian Forrest, investment research analyst at The Share Centre, says: “The deal looks attractive for investors, especially those seeking a higher level of income. It offers a mixture of cash and shares which value each BG share at £13.67, based on yesterday’s closing price. This makes for a premium of 50%, a level not seen for over a year. BG has long been seen as a takeover target, while Royal Dutch Shell has been pondering its acquisition options for a while.

“BG’s shares have been hit hard by the fall in oil price, and have traded close to a five-year low for several months, with only a modest dividend to provide some comfort for its shareholders. That last point has not gone unnoticed by Shell which has paid very good dividends for many years. It has a significant cash pile and expects to see that boosted further by the deal. As a result it has announced its intention to pay dividends of $1.88 this year, and at least that amount next year. On top of that it plans to start a $25bn share buyback scheme to run from 2017 to 2020.

“For Royal Dutch Shell the logic of the deal is clear – it would instantly turn the group into the largest independent natural gas producer in the world with the resources to fully exploit BG’s vast fields in East Africa, Brazil and Australia.

“For existing BG investors seeking income this is a good offer. We also retain our ‘buy’ recommendation on Shell for lower risk investors seeking income, due to the potential benefits of the deal and the boost to future dividends.”

Leave a Reply

Your email address will not be published. Required fields are marked *