Five questions for Shell over BG Group deal

April 8, 2015 9:08 am

Five questions for Shell over BG Group deal

Michael Kavanagh

The BG Idku gas hub off Egypt’s coast

Why is BG particularly attractive to Shell?

Although Shell chief executive Ben van Beurden is generally admired for his conservative approach on tackling costs and maintaining dividend flow, the Anglo-Dutch company is also judged to have a poor record in replenishing its resource base — the key driver to future cash flows on which oil majors depend. BG plugs that gap by adding 25 per cent to Shell’s proved oil and gas reserves and 20 per cent to its production.

Does Shell have the financial firepower to conclude the deal?

Early actions taken by Shell ahead of the meltdown in the crude oil price since last summer have been aimed at reducing gearing and driving up free cash flow. A cash-and-paper deal, though pitched at a 50 per cent premium to BG’s recent share price, should raise few concerns that Shell is overstretching its balance sheet

What will Shell get?

In essence, the Anglo-Dutch major is buying a large spike in production growth about to come on stream at BG Group, which has invested heavily in multibillion-dollar development projects over the past five years to bring to market large gas reserves in Queensland and Australia, and deepwater oil discoveries off Brazil.

Are there obvious synergies?

Shell has a global range of upstream assets, including controversial tar sands projects and an Arctic exploration programme that has attracted attention from environmental protesters. However, it also promotes itself as among the most “gassy” of the world’s oil majors, with a big exposure to projects supplying natural gas to industrialised economies, particularly in Asia. Acquiring BG’s interest in a $20bn coal bed methane project in Australia, which has just come on stream, would immediately bolster Shell’s global position as a key supplier of liquefied natural gas

Is Shell’s offer likely to flush out any rival suitors?

Confirmation of Shell’s approach will have had many observers pondering whether another major — particularly ExxonMobil — might make a play for the UK company. Investor sentiment towards BG has been knocked in recent years by a series of profits warnings caused by stuttering production at current assets and management turmoil. But the recommendation of Shell’s offer by Andrew Gould, BG’s chairman and an industry veteran, suggests it is all but a done deal.

Copyright The Financial Times Limited 2015.

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