International oil major Shell has made a US$70 billion cash and share offer for UK-headquartered deepwater and LNG-focused BG Group in what is one of the first supermajor deals since the early 2000s.
The move, which offers a 52% premium to BG Group's share price, based on the last 90 day's trading, is expected to close in early 2016.
According to Bloomberg Business, the deal, which makes the combined Shell-BG bigger than BP and Chevron in market value, could "presage a repetition of the wave of deals a decade and a half ago" which created today's oil majors.
The deal will add some 25% to Shell’s proven oil and gas reserves and 20% to production, including LNG and deepwater assets in Brazil and Australia, and enable an increase in asset sales to $30 billion by 2016-18.
Shell CEO Ben van Beurden said the move was “exciting,” creating the largest producer of LNG among international oil companies. Speaking at an analyst event this morning, he said “bold strategic moves shape our industry and Shell and BG Group are a formidable fit.”
Analyst firm Simmons & Co. said the deal makes "immense strategic sense" for Shell. "If one takes a long-term view on LNG markets and commodity prices, the acquisition will create an LNG behemoth with unmatched scale and flexibility. The combined group’s equity LNG capacity is expected to reach 45 MTPA by 2018 vs. Shell’s current capacity of 26 MTPA in 2014 (an increase of 78%)," Simmons & Co. said.
The firm listed another benefit, BG's Brazilian pre-salt assets, referring to them as "the crown jewel" of the deal. "The resource quality of said assets is unquestionably impressive. Above ground risk associated with Petrobras' operatorship is also significant. The Combination has the potential to increase Shell’s Brazil production from 52,000 boe/d in 2014 to an estimated 550,000 boe/d by the end of the decade," the Simmons & Co. said.
BG Group was created when utility British Gas (the UK’s privatized gas utility) divested the Centrica business. It has been under recent leadership hiatus, with former Statoil CEO Helge Lund joining the business as CEO early February, a month earlier than planned, replacing Andrew Gould, who in April 2014 had stepped in as interim CEO when Chris Finlayson resigned as CEO after only a year in the role amid profit warnings and disagreements over strategy.
The firm has been under pressure from shareholders and some have suggested the firm should be broken up, with concerns that it wouldn’t be able to handle the large projects it had taken on. According to analysts Investec, a tie-up between Shell and BG Group has been mooted for about 20 years.
Shell says the combination will accelerate its growth strategy in deepwater and global LNG, particularly Brazil's deepwater and Australia LNG, as well as offering operational and cost synergies across the business, enabling cost reductions, including a reduction in exploration spending.
Van Beurden said the move would see the combined group take steps to refocus company, enabling greater focus on fewer strategic areas for bigger impact.
"BG will accelerate Shell's financial growth strategy, particularly in deepwater and LNG: two of Shell's growth priorities and areas where the company is already one of the industry leaders," he said. "Furthermore, the addition of BG's competitive natural gas positions makes strategic sense, ahead of the long-term growth in demand we see for this cleaner burning fuel.
“This transaction will be a springboard for a faster rate of portfolio change, particularly in exploration and other long-term plays. We will be concentrating on fewer themes, and at a larger scale, to drive profitability and balance risk, and unlock more value from the combined portfolios.”
Simon Henry, Shell’s CEO, said Shell would take the opportunity to undertake a fundamental review of the attractiveness of its assets long term. Shell’s new planned spending would be below $40 billion in 2016 and less than that again in 2017, compared to a base of $50 billion in 2014.
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