Shell Buys BG Group

Royal Dutch Shell says it has agreed to buy oil and gas exploration firm BG Group in a deal that values the business at £47bn reported the BBC.

The two firms say they have reached agreement on a cash and shares offer which gives investors a 50% premium on BG Group’s share price on 7 April.

The deal could be one of the biggest of 2015 and could produce a company with a value of more than £200bn ($296bn).
BG Group’s shares opened up 42% on the London Stock Exchange to 1,293.5p.

Shell’s £177bn market capitalisation dwarfs that of BG, which now stands at £31bn after a 20% fall in its share price over the past year.

BG Group is the UK’s third largest energy company. It was created in 1997 when British Gas demerged into two separate companies: BG Group and Centrica.

BG Group took control of exploration and production while Centrica took charge of the UK retail business of the former British Gas. BG currently employs about 5,200 people in 24 countries.

Shell said BG Group shareholders would enjoy higher dividends, as it confirmed its intention to pay its existing shareholders $1.88 per ordinary share this year.

That compares with a dividend of just $0.14 that BG Group shareholders can expect to receive this year.

The oil giant also said it expected to commence a share buyback programme in 2017 of at least $25bn.

And Shell said it would also provide BG Group shareholders with a “mix and match facility”, allowing them to vary how much they receive in cash and new Shell shares.

Shell and BG Group expect to make annual savings of $2.5bn following the deal.

But Shell chief executive Ben van Beurden said he remained committed to North Sea oil and expected to invest £4bn between 2016 and 2018.

Shell said the deal would also add 25% to its proven oil and gas reserves and 20% to production capacity, particularly in Australia’s liquid natural gas (LNG) market and in deep water oil exploration off the Brazilian coast.

BG Group shareholders will own approximately 19% of the combined group following the deal.

Defensive merger?
The deal comes at a time of uncertainty for oil and gas companies. In the past six months the price of oil has fallen by about 50%. Meanwhile, analysts have warned that investment in North Sea oil exploration has all but dried up, threatening the entire industry.

Last month, the Chancellor, George Osborne, lowered the supplementary corporation tax levied against oil companies that operate in the North Sea.

BG Group warned in February that it would write down the value of its oil and gas assets by nearly £6bn ($9bn) due to the oil price slump.

Similarly, Shell announced in January that it would be cutting spending by nearly £10bn over the next three years.
It also said today that it expects to make asset sales totalling $30bn between 2016 and 2018, although it did not specify which assets it was reviewing for sale.

Asked about potential job losses in the North Sea, Shell and BG Group said they expected there to be “global synergies”, while adding that if the deal had not happened, they might both have had to make job cuts.

Current BG Group chief executive Helge Lund, who took up the post last month, will remain with BG Group while the deal goes through, but is expected to leave once it is completed.

BG Group chairman Andrew Gould said the BG board remained confident in the energy firm’s long-term prospects under Mr Lund, but that Shell’s offer “allows us to accelerate and de-risk the delivery of this value”.

Even so, the payout that Mr Lund is likely to receive, alongside the boost he will receive to his income from his BG Group shareholdings, will raise eyebrows.

In December, BG’s board revised Mr Lund’s proposed £12m upfront shares bonus, after shareholders and the Institute of Directors complained.