April 9, 2015 6:43 pm
Oil price holds key to success of Shell takeover
David Oakley, Investment Correspondent/FT
In short, the success or failure of the blockbuster energy deal hinges on Shell’s long-term oil price assumptions for the transaction involving a range of $70 to $110 per barrel for Brent crude, according to some of Europe’s biggest investors.
“The real issue is whether you believe the oil price will rise to $90 a barrel or not, which is in the middle of Shell’s range. If it rises to $90, then this deal becomes financially brilliant,” says Matthew Beesley, head of global equities at Henderson Global Investors, which holds shares in Shell and BG.
“If the oil price rises to $70 dollars, then the deal is financially tolerable, but if it does not move higher than where it is today at just over $50, then that is a problem.”
Richard Marwood, senior investment manager at Axa Investors, another shareholder in both groups, adds: “This is a punt on the oil price. But I think the deal makes absolute sense. It has our backing.”
The plunge in oil prices — Brent crude has dropped about 50 per cent since last summer to $57 per barrel on Thursday — is one of the key factors behind Shell’s planned takeover of BG. The oil slump dragged down the valuations of all energy companies, including BG, which had already been hit by profit warnings and management upheaval.
Unveiling the BG deal on Wednesday, Shell said the transaction would be strongly earnings accretive from 2018, but some analysts have questioned whether that would be achievable if the oil price does not recover.
Other investors in the two companies say moves in the oil price over the last decade suggest Shell’s long-term assumptions looks sensible. “A lot does depend on the oil price, but the lessons of history tell us that very low oil prices do not last,” says Michael Clark, portfolio manager of Fidelity MoneyBuilder Dividend Fund.
However, despite the backing of some big investment groups, there is still scepticism over the planned tie-up. The shares Shell plans to use in the cash and stock offer for BG have fallen sharply. These so-called B shares dropped more than 8 per cent on Wednesday — the biggest fall since 2008 — although they rose almost 1 per cent on Thursday. BG’s shares have jumped almost 30 per cent since the deal was announced.
Concerns largely centre on the price tag — Shell is paying a 50 per cent premium for its smaller rival, and the deal values BG’s equity at £47bn. With BG’s debt, the enterprise value is almost £55bn. Some shareholders fear this may have negative repercussions for Shell’s dividend, which contributes 10 per cent of the total paid out to UK equity investors.
There are also worries over whether Shell chief executive Ben van Beurden can deliver the promised $2.5bn of annual cost savings. And, although acquiring BG will turn Shell into the largest foreign oil company in oil rich Brazil, risks of delays to projects remain. As well, questions remains over BG’s alliance with Petrobras, Brazil’s state-controlled oil group that is reeling from a corruption scandal.
Michael Hulme, commodities fund manager at Carmignac Gestion, which has shares in Shell, says: “I think this deal depends on some heroic assumptions about the oil price. Shell is also a large, bureaucratic entity with not a great track record on acquisitions. The combined entity may transfer some of the bureaucracy of Shell at the expense of the more nimble BG.
“BG also faces the double whammy of a quagmire of delays and execution risk in Brazil with its main partner [Petrobras] mired in corruption and risking insolvency, and the risk of the LNG [liquefied natural gas] market going sour, which would put an extremely valuable stream of profits at risk.”
On more technical matters such as Shell’s mix of cash and stock for the takeover, investors are largely happy the company will be using B shares. The B shares are more liquid and have identical voting rights to the A stock, the dividends of which are subject to Dutch withholding tax.
Copyright The Financial Times Limited 2015.