Extracting the value from UK energy stocks
After all the fuss over the appointment and fat cat pay for Helge Lund, the new chief executive of BG, one must wonder why chairman Andrew Gould bothered.
Just weeks after Lund took the reins, assets were written down by £6bn and Gould found himself in cloak and dagger talks with royal Dutch Shell’s chief executive Ben van Beurden in a hotel room at the Dorchester.
Shell had been closely monitoring BG, the former exploration arm of privatised British Gas, since the final quarter of last year when global oil prices fell off a cliff.
Suddenly, the struggle to explore and extract more expensive forms of fossil fuels from sands in the great Canadian wastelands and in the Arctic looked an extravagance.
BG, in Shell’s sights for a very long time, came looming into view.
In essence, Shell has sounded the starting gun for more mergers in big oil which has been a largely stagnant sector in the UK since former BP boss Lord Browne snaffled up Arco and Amoco in the US in 1999 and 2000.
Van Beurden is quick to claim the £47bn takeover as creating a new British champion for the London Stock exchange. It will extend Shell’s leadership as the biggest quoted firm on the LSE and is infinitely preferable to an overseas takeover. But we should not be gulled into thinking that this is an allBritish deal.
Shell remains a twin-headed giant with tax headquarters in the Netherlands, where it holds its annual general meeting, and Continental domination at the top. To ensure Shell’s new investors, including up to half a million ‘Sids’ still on the register, share in the spoils in terms of dividends, permission was required from the Dutch authorities to print more of the ‘B’ class of shares traded in London.
The good news for the Sids is that they are effectively getting the near-50pc premium on the shares, from the previous closing price, as free money.
The BG share price, which has traded down from £13.50 in 2014 to £8 this year, made the explorer something of a sitting duck. BG has plenty of exploited and exploitable resources from Brazil to the Pacific and Africa but has lacked the balance sheet to invest as heavily in production as it would like. Shell should fill that need. There is some investor concern about a lack of savings except perhaps in the North Sea where both companies operate. However, this is a deal less about cost cutting than providing Shell with reserves in the liquefied natural gas and deepwater drilling.
If anything, the need for some agglomeration in the energy sector has been underlined by the recent framework deal between the West and Iran on limiting nuclear development. It likely will mean Iran escaping from the sanctions noose and being able to sell much more oil. That, together with the fracking revolution in the US and Saudi Arabia’s strategic reasons for keeping on pumping, suggests that a secular rise in the oil price retreats ever further into the distance despite conflict across the Middle east from Iraq to Yemen.
The swoop on BG means Lord Browne’s dream of a grand alliance between Shell and BP, to take on Exxonmobil, is unlikely. A likelier scenario would be a raid by the US colossus on a BP enfeebled by American regulatory punishment, as a result of the Macondo accident in the Gulf of Mexico and its partnership with rosneft in russia.
That would really set the cat among the pigeons in Whitehall where BP has long been regarded as a strategic special case.
Mega deals
The starting gun for a new series of UK mega-mergers was sounded in December last year when BT announced its £12.5bn bid for mobile operator ee. Big deals have been off the agenda in recent times partly because nonexecutives have been fearful of signing off on disasters such as the royal Bank of Scotland bid for ABN Amro.
Now that boldness has reemerged who comes next? Sky shares have moved up sharply in the last couple of months with Vivendi believed to be among those sniffing around. Other potential targets are thought to include the supermarket concern J Sainsbury (where Qatar has a dominant stake) and luxury brand Burberry.
In the energy sector could Centrica, one of the other companies spun out of old British Gas, become a target?
Who said the UK election would stop the wheel of fortune spinning?