SHELL DEALS ITS WAY INTO NATURAL GAS
$70B purchase drives it to LNG leader
LONDON Royal Dutch Shell’s $70 billion purchase of Britain’s BG Group will make the energy giant the biggest global producer of liquefied natural gas, a fast-growing market expected to boom as developing countries and industrial energy users convert from coal and oil.
Shell, already a leader in liquefied natural gas (LNG) for shipping and transport, will meld BG’s gas reserves, including assets in Australia, Brazil and Africa. That will increase its overall crude oil and natural gas reserves by 25% and 20%, respectively, adding to its production capacity.
Under terms of the cash and stock deal, BG shareholders will own about 19% of the combined company, which will have a market capitalization of about $240 billion — or twice as big as British oil major BP. Still, it will be smaller than ExxonMobil, the world’s largest publicly traded oil company, which has a market cap of $360 billion. But with BG’s gas reserves, Shell will boost its capacity to 33 million tons of gas annually, overtaking ExxonMobil to become the world’s biggest leader in LNG.
“LNG is a very important component of this,” Shell CEO Ben van Beurden said. “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.”
Liquefied natural gas “is a scale business,” van Beurden said. “And clearly there is potential to add more value here, as well as cost synergies from the combined shipping operations and trading platforms.”
The mega-merger, one of the biggest in the energy sector in over a decade, comes amid a slump in oil and natural gas prices, and it could ignite a flurry of industry mergers.
The announcement propelled BG’s London-listed shares up 38%. American Depositary Receipts (ADRs) of Royal Dutch Shell eased 3.4% to $59.83.
“The combination of our two businesses is a powerful one, which has sound strategic logic,” said Andrew Gould, chairman of BG Group, in a conference call. “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,” he said.
Shell said the deal would produce savings of about $2.5 billion a year. The deal also represents an opportunity for both firms to cut overlapping costs. Shell said the merger will cut current spending on oil and energy exploration by nearly 50%.
Still, the deal won’t boost Shell’s earnings until at least 2017. Executives said the deal will be “mildly accretive to earnings per share in 2017 and strongly accretive thereafter.”
BG was created in 1997 when British gas split into two companies. Last year, BG moved its LNG trading business to Singapore from London, a move that could cut its annual taxes by $200 million.
“We firmly believe that this is the right strategic next step for Shell’s shareholders, and for the shareholders of BG,” Shell Chairman Jorma Ollila said on a call with industry analysts. “By combining BG’s portfolio and skills set with Shell’s capabilities, we can deliver a step change in the growth priorities for both of our companies.”
Oil prices have tumbled more than 50% since June on sluggish global demand and burgeoning supplies. Wednesday, benchmark West Texas intermediate crude dropped 5.7% to $50.93 a barrel, while Brent crude lost 5% to $56.06 after the U.S. Energy Information Administration reported sharp increases in U.S. oil stockpiles last week.
Spot natural gas prices have been in an even more prolonged slump. At about $2.62 per million British Thermal Units (BTUs) in Wednesday trading on the New York Mercantile Exchange, natu- ral gas is trading at a fraction of the $11 level it was at in 2008.
But unlike crude oil markets, where benchmark trading is largely confined to a handful of markets, natural gas prices vary by region and country.
Georgetown University professor Brenda Shaffer, an energy specialist, says Royal Dutch Shell appears to be banking on both BG’s markets and the globalization of natural gas prices.
“Prices are completely fractured market to market,” Shaffer says. “With this kind of deal, Shell thinks the market is going toward a global market and they’ll be in a good position to have a large geographic spread.”