After rumors circulated yesterday afternoon, this morning brings confirmation of the largest M&A transaction in over a decade in the oil and gas sector.
Shell will acquire BG Group for $70 billion. It’s the biggest deal in the sector since 1998, when Exxon acquired Mobil. Shell will pay a 50% premium to BG Group’s closing share price of $13.56 on Tuesday.
As we noted yesterday, this epic deal is for E&P like what Halliburton’s $35bn purchase of Baker Hughes was for the oil services space last year. That is, it consolidates two of the sector’s giants. BG Group has a market cap of $46 billion, while Shell has a value of $200 billion. With the deal’s implied premium, the combined market cap could exceed $250 billion. That’s twice the size of BP and surpasses Chevron’s market value. The combined company will be western Europe’s largest integrated O&G company. For context, ExxonMobil’s market cap is $350bn.
Including the Shell bid for BG Group, global M&A volume in the O&G sector stands at $112 billion so far in 2015. That’s almost double the $61.4 billion over the same period last year. The deal is indicates that sector consolidation and M&A activity is heating up in this phase of the downcycle. For an assessment of what this means for oil service and drilling, read more here.
What Shell Gains
Shell CEO Ben van Beurden said on a conference call Wednesday morning that the fundamental rationale for the acquisition “always existed, what has happened in the last month is that it has become very compelling from a value perspective.” He added that the combined company will be the largest LNG producer among IOCs and that gas is a “very important” part of the deal.
If completed, the purchase will add 25% to Shell’s O&G reserves and 20% to production. Shell said it also expects synergies of about $2.5bn – some headcount reductions will be inevitable. Further, Shell also said it intended to boost asset sales to $30 billion between 2016 and 2018 on the back of the merger.
Shell said in a statement that, by about 2020, the combined company will have two strategic growth segments— integrated gas and deep water- that could each produce $15 billion to $20 billion of cash flow from operations per annum. BG Group holds valuable O&G fields offshore Brazil and gas assets offshore East Africa, as well onshore Australia assets, that many analysts previously indicated were too large for BG Group to handle, a WSJ report said Wednesday.
Shell said that a key rationale for pursuing the deal was the acceleration of its growth strategy in global LNG and deepwater. Van Beurden said during the Wednesday conference call, “LNG is a very important component of this…The whole idea is that we turn the company on the back of this deal into a much more focused company, very, very strong in gas and very, very strong in deep water.”
Shell also pointed to a complementary fit in 15 countries and that ~$2.5 billion/year of synergies have been identified so far. The map below from Shell’s presentation this morning visually captures the magnitude of the deal.
Here’s a summary of the metrics of the deal:
- 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 billion
- BG shareholders to own 19% of Shell
- Transaction underpinned by intrinsic asset value of BG
- Mildly accretive to earnings per share in 2017 and strongly accretive from 2018
- Accretive to cash flow from operations per share from 2016
Where BG Group Stands Now
Former Statoil CEO Helge Lund assumed the reins of BG Group on February 9- three weeks ahead of schedule- instead of the previously announced date of March 2, after Statoil released him from his contractual obligations. The announcement came after BG Group said it was writing down the value of its O&G assets by almost $9 billion amid the plunge in oil prices.
In after-hours trading on Tuesday, Shell’s US-listed shares were more-or-less unchanged, while shares BG Group trading in London gained more than 6% on Tuesday. YTD, Shell shares are down more than 7%, while BG shares are up 5%.
Lund is now tasked with reassessing BG Group’s collection of gas-weighted assets in countries including Tanzania, Australia and Egypt. Another challenge he is facing is presented by the company’s significant presence in Brazil’s offshore arena in partnership with state-owned Petrobras, which is in the throes of a corruption scandal that prompted the recent resignations of the CEO and five other executives.
Where Shell Stands Now
For Shell’s part, the company said in January that it will curtail its spending by more than $15 billion and freeze its dividend, as the company’s profits have been hit by the ~60% plunge in oil prices since June.
CEO Ben van Beurden said during the quarterly conference call that the Anglo-Dutch major would respond to the decline in oil prices by “stepping up our drive for stronger capital efficiency.”
Per this strategy, he announced the company is curtailing its spending by more than $15 billion over the next three years. Van Beurden said that early-stage projects would be delayed and that steeper spending cuts would be implemented if rendered necessary by the price environment.
“Today we are taking steps to preserve Shell’s financial flexibility and this includes a freeze in dividends, and the slowdown in capital spending in 2015, making the tough choices on Shell’s rich petroleum funnel…But at the same time, we have to be careful not to overreact to spot prices. So we are maintaining a downward pressure on capital spending. We have plans in place today to further reduce our spending if need be, but at the same time, we are continuing with a very attractive suite of projects which are under construction and we are preserving where we can,” van Beurden said during the January call.
Share Price Reaction
Shares in Shell fell 5% in early trading in London on Wednesday, while BG Group shares rose 37%. The merger also buoyed stocks across Europe, with the O&G subindex of the Stoxx Europe 600 index soaring 5.5% in early trading.
Ben Van Beurden, Shell CEO: “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.”
“At the start of 2014, Shell embarked on an improvement programme, including divestments and the restructuring of underperforming businesses, whilst at the same time delivering profitable new projects for shareholders. This programme is delivering, at the bottom line.”
“BG will accelerate Shell’s financial growth strategy, particularly in deep water and liquefied natural gas: two of Shell’s growth priorities and areas where the company is already one of the industry leaders. Furthermore, the addition of BG’s competitive natural gas positions makes strategic sense, ahead of the long-term growth in demand we see for this cleaner-burning fuel.”
“This transaction will be a springboard for a faster rate of portfolio change, particularly in exploration and other long term plays. We will be concentrating on fewer themes, and at a larger scale, to drive profitability and balance risk, and unlock more value from the combined portfolios.”
“Over time, the combination will enhance our free cash flow potential, and our capacity to undertake share buybacks, where I expect to see a substantial increase in pace.”
Jorma Ollila, Chairman of Shell: “This is an important transaction for Shell, accelerating the delivery of our strategy for shareholders. The result will be a more competitive, stronger company for both sets of shareholders in today’s volatile oil price world. BG shareholders will receive significant value through the premium being offered for their shares. They will become shareholders in Shell, accessing an attractive dividend policy, a share in the significant synergies and the compelling upside and enhanced operating capability of the combined group. We believe that the combination is in the interests of both our companies and their shareholders.”
Helge Lund, CEO BG Group: “The offer from Shell delivers attractive returns to shareholders and has strong strategic logic. BG’s deep water positions and strengths in exploration, liquefaction and LNG shipping and marketing will combine well with Shell’s scale, development expertise and financial strength. The consolidated business will be strongly placed to develop the growth projects in BG’s portfolio. The transaction will take time to complete, during which my team and I will remain committed to BG and our shareholders, and to safely delivering our 2015 business plan.”