Shell’s $70 Billion Deal for BG Group Faces a Few Hurdles
Blockbuster deal must contend with regulatory challenges in China and tough scrutiny from investors
The combination of the two energy producers is subject to review by regulators. ILLUSTRATION: BLOOMBERG NEWS
SELINA WILLIAMS and SARAH KENT/WSJ
April 9, 2015 8:06 p.m. ET
LONDON—Royal Dutch Shell PLC’s $70 billion purchase of BG Group PLC’s natural-gas assets and deep-water oil fields now faces regulatory challenges in China and other countries and tough scrutiny from investors.
The blockbuster deal would transform Shell into the dominant player in the world’s growing liquefied natural gas market and make it the biggest international player in Brazil’s oil-rich waters. Those positions also could make it a target of regulators, industry observers said.
The companies declined to comment Thursday, but Shell CEO Ben van Beurden and BG Chairman Andrew Gould said Wednesday that regulatory issues in several countries would push the deal’s completion to early 2016. They said they expected no major problems, though.
“So far no insurmountable issues identified,” Mr. van Beurden said.
The regulatory hurdles are just part of the reason Shell shareholders appear to be down on the deal. The company’s stock has fallen 8% since news of the deal broke Tuesday night.
Petroleum giant Royal Dutch Shell has agreed to buy BG Group for about $70 billion, in a deal that would create the world’s largest independent producer of liquefied natural gas amid a historic downturn in energy prices. Photo: AP
Michael Hulme, commodities fund manager at Carmignac Gestion—which owns shares in Shell—expressed concerns about the 50% premium Shell paid for BG and how that will affect future dividends.
Some analysts described the deal as an about-face for Shell, a company that before the deal had vowed to become leaner and more return-focused.
“There are always risks with these mega transactions,” said Dougie Youngson, oil and gas research director at brokerage finnCap.
Among the unknowns are how China will react. The country is a growing buyer of LNG, and its main antitrust agency, the Commerce Ministry, has become increasingly forceful.
At least twice in recent years China has blocked deals involving non-Chinese companies. In one case, Chinese regulators last year rejected plans for a broad alliance between the world’s three-largest shipping companies, even though the plan had won U.S. and European approval. When mining giant Glencore PLC bought Xstrata in 2011, a copper mine was sold to a Chinese company as part of the approval process.
Chinese officials didn’t respond to requests for comment.
“I can’t imagine that as a customer China is going to be enthusiastic about consolidation in the industry in terms of its bargaining power,” said Bill Fries, portfolio manager of Thornburg International Value Fund, which holds positions in Shell and BG.
In Brazil, where BG’s highly prized oil fields were one of the main drivers for the deal, the risks go beyond the lengthy approvals process. Petróleo Brasileiro SA, the state-run company that partners with BG in its Santos Basin oil fields, is in the grip of a bribery scandal. Local laws have resulted in an underdeveloped supply chain, endemic cost inflation and delays.
“Brazil has got endless capacity to disappoint. It’s not easy to operate there even though reserves are vast,” said Andy Brogan, oil and gas transactions leader from consultancy Ernst & Young.
In Australia, the regulatory review is likely to be “a rigorous process,” said Mr. Youngson, as the tie-up gives the combined company a substantial position in gas assets in eastern Australia.
Beyond the regulatory challenges, some investors are skeptical that Shell can deliver on its promise that the deal will significantly bolster earnings per share starting in 2018. Oil prices would need to return to $90 a barrel, nearly double their current level for Shell to meet its stated goals. Uncertainty over the timing and scale of the growth in demand for liquefied natural gas in Asia also poses longer term risks.
Above all, the acquisition is a turnaround for Shell, which has spent the past year cutting costs and stressing value over volume after a rare profit warning in 2014.
Before the deal, Shell, which has one of the strongest balance sheets in the sector, was viewed as a company well-positioned to weather the recent slump in oil prices, according to Barclays.
Once the deal is complete, Shell’s gearing—a measure of the extent to which a company’s operations are funded by debt—will increase to 20% from 12%. The increase was cited as a factor when Fitch Ratings said Wednesday it was placing the company’s double-A credit rating under review.
“Shell had been viewed as a pretty defensive stock in a low oil-price environment,” saidJason Gammel, an analyst at Jefferies. “This deal does negate that,” he added.
Mr. van Beurden says ultimately the BG deal will create a more focused and streamlined Shell, still dedicated to reducing costs and selling noncore assets.
But some analysts are skeptical.
“The moniker “small but beautifully formed” rarely applies to Shell,” Investec analystNeill Morton said in a note.