Royal Dutch Shell has agreed a £47bn ($70bn) takeover of gas group BG in one of the biggest deals seen in the oil and gas sector for a decade. It will create a company worth more than £200bn.
BG Group’s new chief executive, Helge Lund, who joined the company in early February, will leave once the deal goes through next year – and could walk away with up to £25m under the terms of his contract. His controversial pay deal sparked a shareholder revolt in November, forcing BG to amend his package to link earnings more closely with company performance.
A BG spokesperson said: “The shares Helge has been granted are subject to the performance of BG up to the point of completion of this transaction. . Until that point, we do not know what the amount will be.”
There has been widespread speculation that BG would become a takeover target, with many City oil experts predicting Exxon would make a move on the British business.
Shell said on Wednesday it was offering a cash and shares deal worth £13.50 a share – a 50% premium on BG’s market value on Tuesday night, when news of the deal first leaked.
BG’s share price soared 42% to £13 on the news, while Shell shares fell 4% to £21.16. Shares in other energy stocks rose, with rival BP climbing 4.3% to 475p amid speculation that it could become the next target. BP is valued at around £86bn.
Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers, said: “The deal could prompt other companies who have been running the slide rule over potential targets to make their move.”
Energy sector executives have been predicting a round of consolidation among oil and gas companies as a result of the sharp slide in crude prices, as witnessed in the 1990s, when BP and Exxon both snapped up rivals.
BG’s chairman, Andrew Gould, described Shell’s offer as compelling.
Ben van Beurden, chief executive of Shell, said: “Bold, strategic moves shape our industry. BG and Shell are a great fit. This transaction fits with our strategy and our read on the industry landscape around us.” He added: “BG has always been on the top of [our] list.”
Shell’s chairman, Jorma Ollila, said the deal was an important one for Shell: “The result will be a more competitive, stronger company for both sets of shareholders in today’s volatile oil price world.”
The transaction will be the biggest this year and the fourth largest oil and gas deal globally since 1996.
Van Beurden said the combined business will sell off £20bn of assets (from both portfolios) between 2016 and 2018, most of which will be returned to investors via a £17bn share buyback.
Shell said the deal would create pretax cost savings of about £1.7bn a year. It will add some 25% to the company’s proved oil and gas reserves and 20% to production, as well as strengthening its position in new oil and gas projects, particularly in Australia LNG and Brazil deep water. BG and Shell both have huge interests in the LNG market – liquefied natural gas that can be shipped around the world in tankers.
When the stockmarket closed on Tuesday, BG group – which has 5,200 employees and was once part of the nationalised British Gas business – was valued at some £31bn. It also has debt of around £8bn.
Like other oil and gas companies, BG has been hit hard in recent months by falling prices. A glut of oil has seen the price fall nearly 50%, to around $59, since last summer. The company’s profits were down nearly 20%, to just over $900m, in the three months to the end of last year.
Shell has also been affected by falling oil prices. Only two weeks ago the vast Anglo-Dutch business unveiled 250 job cuts in the North Sea and changes to shift patterns for workers in a bid to cut costs. But Van Beurden said the company was committed to the North Sea and would invest £4bn between 2016 and 2018.
Shell is a strong enough business to be in a position to buy assets in order to be well placed to cash in when prices eventually rebound. Buying proven oil and gas assets when prices have fallen is far cheaper than exploring for new reserves.
Matthew Beesley, head of global equities at Henderson Global Investors, said the takeover is important for all UK pension savers. It means Shell will account for nearly 11% of UK related dividend income.
He added: “Shell’s acquisition of BG will likely be viewed as strategically smart and opportune, but should oil prices stay lower for longer, while it will be good for the UK consumer, it could put pressure on UK dividends and be detrimental to UK pension investors.”
Pascal Menges, manager of the Lombard Odier Global Energy Fund, said: “This shows that big oil’s growth strategy over the last 10 years is bust. Having bet enormous sums on eye-wateringly expensive oil production from oil sands, ultra-deep water and arctic fields the supermajors are now ill-placed to cope with a low oil price.”
BG has had a difficult couple of years. Once a stockmarket favourite, it fell out of favour as its performance faltered. Its shares are down around 30% on a year ago.
Last week Lund, the former boss of Norway’s Statoil, hired two former Statoil executives, including Katie Jackson as vice-president for global strategy and business development. Jackson had been responsible for merger and acquisition deals at Statoil under Lund’s leadership.
(Published by The Guardian – April 7, 2015)