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The Shell-BG Megadeal: All You Need To Know, And Why The Initial Response Is Not Enthusiastic
As previously reported, overnight oil giant Royal Dutch Shell agreed to buy BG Group for £47 billion ($69.6 billion) in cash and shares, the 14th largest ever corporate takeover, the largest energy transaction in the past decade, and as the WSJ put it, "the latest sign of how tumbling energy prices are shaking up the global oil-and-gas industry."
The catalyst for the rushed, and unsolicited, deal: the sharp drop in oil and gas prices since last summer, with the hope being that thousands of layoffs and operations synergies would enable the two European energy giants to eliminate overlapping costs to lower the breakeven oil production cost.
As the WSJ, which broke news of the deal first, adds, the combination "furthers Buying BG will add 25% to Shell’s proved oil and gas reserves and 20% to production and give it access to BG’s highly prized offshore oil fields in Brazil’s Santos Basin, significant undeveloped natural gas resources in East Africa and a huge liquefied natural gas project in Australian that is ramping up this year."
Here are the key deal terms and conditions:
- 0.4454 Shell B shares and 383p in cash per BG share
- Represents a value per BG ordinary share of 1350p, a premium of 52%
- Values BG equity at £47.0 billion3
- BG shareholders to own 19% of Shell
- Equity increase:
- 1,532 million new B shares
- Election option for A shares
- ‘Mix and match’ election between cash and shares
- Purchase price allocation (IFRS 3 + 13)
- ~ - $2 billion post-tax P&L annual impact
- To be implemented by Scheme of Arrangement
- Key conditions: shareholder + regulatory approvals
Here is Shell's pitch to its shareholders why they should endorse the deal:
- Mildly accretive to earnings per share in 2017 and strongly accretive from 2018
- Accretive to cash flow from operations per share from 2016
- Accelerates deep water + LNG strategy
- Accretive to earnings and cash flow per share
- Complementary portfolios: synergy opportunity
- Enhanced portfolio: springboard to high-grade Shell + BG
- Improved cash flow enhances future dividends + buyback potential
Some, see below, disagree with the proposed corporate assessment.
The combination as summarized by Shell:
- Enhanced position in our growth priorities: LNG + deep water
- Complementary fit in 15 countries
- ~$2.5 billion/year synergies* identified + further potential
Why pay a massive premium for BG Group? Here is the politically correct slide explainer:
The full investor slidedeck is presented below:
To be sure, while BG Group soared 37% following the announcement, Shell stock is less than enthused and was down 2% at last check.
Why? The following initial response note from BMO may provide some color on why deals of desperation are never good for investors or management.
BG Group and Shell have announced this morning following a leak in the Wall Street Journal last night that BG has agreed to be acquired by Royal Dutch Shell in a cash and shares transaction. If this deal is completed this would be the end game of a pursuit that began shortly after the listing of the original British Gas group in the 1980s. Shell is paying a very large premium of c 50% to the current 30 share price of 910.4p, which would value BG at US$70bn, which would be one of the largest oillgas deals in recent history. The deal will add 29% to Shell's reserves, 20% to its current production and 27% to its LNG liquefaction volumes. Shell is saying that it has identified US$2.5bn of annual synergies from 2018. Shell is also expecting the deal to be mildly accretive to EPS but strongly accretive to cashflow in 2016. There will by two conference calls at 9am and 2pm London time today.
Our View:
- We think the prime attraction of BG for Shell is its LNG position, which makes up 39% of our current asset value of the company of 1,027p. Combining the two companies would result in LNG liquefaction volumes of 33mtpa, based on 2014 numbers, well ahead of Exxon, the No. 2 player. There is significant growth coining from BG, which is about to start up its QCLNG project, which would add a net 6 mtpa., plus the potential of Tanzania. Shell is forecasting pro-fornia liquefaction combined volumes of 45 mtpa in 2018.
- BG will also bring a solid position in the Brazilian pre-salt, which should amount to net production of 486 kboe/d in 2020 and is 45% of our asset value. The wrinkle in this is that Shell would be the non-operating partner of Petrobras, which is currently in turmoil due to the widespread corruption allegations. It would add, however, to Shell's existing Brazil position, which includes a 20% share of the giant Libra project.
- Other operational benefits include BG's North Sea assets, its position in Karachaganak in Kazakstan, and less important assets in India, Thailand, North Sea, Egypt.
- From our valuation perspective for RDS the BG deal is significantly dilutive, both from a multiple and asset value perspective. Shell is paying a P/E of 66.6x for BG at the acquisition price, although RDSA was trading at only a 12.1x 2016 multiple pre-deal. On an EIT/DACF basis, Shell's 2016 multiple is 6.2x, whilst it will be paying 11.7x for BG. RDS would also be paying a premium of 26% of BG's asset value, we estimate, even after the synergies are accounted for. We estimate that our PDS NAV is diluted by 8% as a result of this the deal. For these reasons we think the market will be sceptical about this deal and we believe Shell will have to work very hard to convince shareholders that the strategic benefits outweigh the premium offered.
All valid points, especially the bolded, however as long as starved for yield bond investors are willing to throw money away, more deals like this one will take place. Ironically, mega mergers like these which cut overhead and boost productivity and efficiency (at the cost of tens of thousands of workers) mean the oil glut will persist for much longer than even the most pessimistic estimates.
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They aren't big enough yet.
The red team seems to be winning.
looks yellow to me, but wtf, green is red and red is winning...
Glad to see Kazakhstan, and its mysterious floating ring, will be well served.
#AppleCouldHavePaidCash
#GTGMyWatchIsRinging
#GTGMyWatchIsRinging...
Didn't Langley coin #GTGMyRingIsWatching years ago?
Yellow has Australia, and when he turns in a set will take all of North America. Red won't be able to hold Asia, no way.
Texashellvrongroupcolero
Shell/Bandito-Gringo
this price will go up
What's that noise? The sound of two big garbage trucks colliding. Which Wall Street calls a merger.
"2017-2020 - Launch of ~ $25 billion share buyback programme" (from Shell's very colorful brochure announcing merger plans)
Before General Motors took a swan dive in 2008, it had spent $25 billion in stock buybacks to keep its share price up, a move that seriously depleted GM's cash reserves. Activist investors (read "greenmailing" hedge funds) were behind this buyback plan. Taxpayers had to bail out GM, and the investment was a muli-billion dollar loser.
On another publication note, does anyone know where I can find a 2011 Sandy Hook Elementary School yearbook?
If anyone knows how to cook books, it's gas companies.
"The big one wot ain't bent over broke bought the other big one with cashflow."
Like watching a cheetah stalk a gazelle with two broken legs.
All these corporate ratbags have the same long term strategy - become too big to fail and the march towards oligopoly, or monopoly in disguise.
They have to expand to support their massive enterprises, retirement funds-matching programs and golf tournaments. Thus, the government for oil programs we lovingly call the US foreign policy.
"Feed me, I'm hungry."
"All these corporate ratbags have the same long term strategy - become too big to fail and the march towards oligopoly, or monopoly in disguise."
In the case of Oil and Gas is all about finding new sources of Oil and gas to drill that are profitable. Much of Shells reserves are in decline, and they need to acquire new assets to stay in business. Its also much cheaper to acquire other assets that go for non-conventional sources to replace depleting fields. In the case of Shell, they cancelled about $175B artic/offshore drilling projects. Buying BG is half the costs than drilling to replace depleting fields with very expensive deep sea/artic drilling.
This is just Peak Oil taking its toll on the industry. 2015 will be global Peak production. Virtually all drillers have stopped/end projects begining in 2013. Since these projects take 3 to 5 years to bring oil to market, the decline slope is going be steep in the years ahead. To replace depleting fields (Running at about 7% per year per field - on average) they must drill and the only untapped resources remain are all non-convential (deep sea, artic or shale). Shale need about $80 bbl to break even and most of the deep sea & arctic projects break even at about $115. So for drillers to go back, the need oil prices north of $100, which seems unlikely since the global economy is weak and can't afford/sustain Oil prices above $100. Perhaps if the US does QE4ever then maybe drillers will start drilling again.
If J.D.Rockefeller were still around.
Someone, remind me why Standard Oil was busted into multiple entities.
You can't make fees merging companies together unless you make fees breaking them apart first.
A la Ma Bell, the Baby Bells and now the most expensive worst fucking service ever ... But Wall Street got rich with with all the deals, underwritings and advisory fees,, so it was all for the Banker's Children.
The same families still own the multiple entities.
The hairs on my neck raise whenever I hear "Royal" or "Dutch."
pods
shouldn't it be "heirs"
tulip maniac!
The Rockefeller wealth increased exponentially upon the break up of SO. That's why. I'm sure he was crying in his beer.
a main problem of current economic system call capitalism( if that ever exsisted)..having grown a small business that become cash flow positive and had profits, the bigger fish buy you out..until there is nothing left for the big big fish to consume, concentration of ownership going on for a long time, with a good bit of illusion as to WHO the big owners of everything really are. USA is at the end of this cycle and we still don't know who owns the production of most everything we use. banks and insurance and finance co's end up owning everything, and a very small elite own them. as in nature the ecosystem can only support a few apex preditors-so in economies concentration of wealth is the norm.
If you can call it a system it aint capitalism. Pretty much every system will end up as you describe.
What you're describing is financialism, not capitalism. As long as some bank will "loan money" to these entities they will continue to consume all others.
In a world of monetary scarcity however, there's no mechanism for this to occur, as eventually all capital is deployed with none being leftover to loan. Get rid of fake banking, and the fake economy will disappear along with it.
Looks more like a consolidation than a growth merger.
Yup. And this is what many people on ZH were predicting during the 2nd half of 2014 while oil was dropping. Of course, most of us thought we see it primarily in shale and tar.
Consolidations like these often indicate that forecast revenues are flat or in decline.
With oil at 40% of where it was nine months ago, one would expect this.
Of course with yellen bidding markets, none of this matters. It is irrelevant what this pig says. But when this pig gets behind a mic, the trigger goes out to the rest of the aligned banks to start bidding. Right GS? JPM?
flashback:
[...] after the turn of the 19thcentury, economic and political war[s?] developed between 'Morgan (Rockefeller's J.P.Morgan Chase*)' interest against 'Harriman*(FDR's main man WWII?)/(Bush Dynasty via Prescott?)-Kuhn-Loeb-Rockefeller.
[...] at the same tyme (simultaneously?) a 'World-Wide War(s)(?!? WWI and culminating with WWII !?!) financial(economic?) and political 'Oil War (NATGAS?)'broke-out between the worlds 'import-export cartel(?)', "Standard Oil"... outside the USSA against the British, "Royal Dutch Shell", a Rothschild's ???subsidary????? [...]!
P
resent
dawn dai
lie... a century later and... moar war?!?
jmo
Royal Dutch Shell is a Rothschild entity?
More cheery news! I don't know how much better the day can get!
Most 'deals' only benefit those on the board and that is the main reason they are done
The real and only goal- become too big to fail at any event.
That is a misnomer. If a system fails, the first ones to go are too big too fail. TBTF either dies or downsizes if it has enough to time to react.
Added exposure to PBR isn't pretty......
God shave the queen! I guess electrics out for a century.
God shave the queen!
I am SOOOO stealing that!
It's all about a dying industry trying to save itself.
It's about M&A and profitability.
As stated in the old 1889 book "The Great Red Dragon" these financial sociopaths are trying "to own the world in fee-simple." They're creating thin-air money to consolidate TITLE to assets into fewer hands, just like all the other "mega-mergers and acquisitions" that have taken place, as well as those in the future. Sometimes The Dragon Wins.
RDS is famous for scenario planning, being ready for twists in the game plan. The new entity will be strong with fuels that the growing emerging markets need while it cuts out expenses to drilling and construction firms and redundant employees. They will expand the float then contract it, a la LBO. Big process firms like energy and chemicals want consolidation for lowering costs and growing market share. Shell is running that standard program and long term holders will go along with it.
First the genius mind of the oil executive:
“It is clear our nation is reliant upon big foreign oil. More and more of our imports come from overseas.”
George W. Bush quotes
Second, An Inconvenient Truth:
The meek shall inherit the Earth, but not its mineral rights.
J. Paul Getty
This is the real reason for the oil price collapse.
Expect more M&A in the industry, as planned.
Enjoy.