 "Shell to buy BG Group for nearly $70 bn")
Royal Dutch Shell said on Wednesday that it had agreed to buy the BG Group for nearly $70 billion, creating a formidable global player in the fast-growing business of producing and selling liquefied natural gas.
BG, which was once part of British Gas, is particularly attractive to Shell because it is a major player in liquefied natural gas, whose use is growing fast despite a recent slump in prices.
To make gas a global commodity, companies are increasingly cooling it into liquid form, shrinking its volume for transportation on specialised ships. Shell has invested tens of billions of dollars in liquefied natural gas production plants, storage terminals and related systems in recent years, building itself into a global leader.
Ben van Beurden, the chief executive officer of Shell, appears to be calculating that low oil prices offer an opportunity to gain assets at a comparatively low cost, despite the premium Shell has offered to pay for BG.
In a call with reporters on Wednesday, van Beurden said that the current period of low oil prices was analogous to the doldrums of the late 1990s, when industry executives like John Browne of BP began a wave of mergers.
In recent years, the oil majors have fallen out of favour with investors as a result of rising costs, falling returns and poor success rates in exploration. Their share prices and earnings have been battered by a roughly 50 per cent drop in oil prices since June.
By acquiring BG, Shell hopes to further increase scale and profit in two areas in which it is already a global leader. The first is liquefied natural gas, a sector that is expected to grow as Asia, particularly China, burns more gas to fuel economic growth and to reduce air pollution from coal. The second is deepwater drilling, most significantly for oil, an area in which Shell is already a leader, including in the Gulf of Mexico and off Nigeria.
BG would also bring to Shell a strong position in Brazil, which is expected to become a leader in production, despite problems at Petrobras, the state oil company.
Shell estimates that the combined company has the potential to increase production in Brazil tenfold, to 550,000 barrels of oil and gas a day.
Shell said the deal would add 25 per cent to its proven reserves of oil and gas and would increase production by 20 per cent, bolstered by BG's Brazilian holdings and its liquefied natural gas project in Australia. Shell expects the deal to yield pretax annual savings of about $2.5 billion.
Shell said that it would pay for the acquisition with a mix of cash and stock, with BG shareholders receiving 383 pence a share in cash, and 0.4454 B shares in Shell for each BG share held. BG shareholders would own 19 per cent of the combined company.
The price is a 50 per cent premium to BG's closing share price on Tuesday. BG shares have fallen about 30 per cent since global oil prices started their steep slide in June.
Shell investors were far less enthusiastic about the deal than BG shareholders were: Shares in Shell fell about 5 per cent, and BG's stock soared about 37 per cent in morning trading in Europe.
"Bold, strategic moves shape our industry," Mr. van Beurden of Shell said in a statement. "BG and Shell are a great fit."
He continued, "This transaction fits with our strategy and our read on the industry landscape around us."
Mr. van Beurden said that Shell had been scanning takeover opportunities, with BG "always at the top of the list." Mr. van Beurden said that he initiated the deal by calling Andrew Gould, BG's chairman, and that "a very good discussion" ensued.
Mr. Gould said during the same call that he and the BG chief executive, Helge Lund, were looking forward to turning BG around. Mr. Gould said that Mr. Lund, a former chief executive of Statoil of Norway who took the helm of BG in February, would assure a smooth transition and then "probably move along."
If completed, the sale would be a rare bright spot for energy deal makers, as oil and gas companies have largely hunkered down while petroleum prices have plunged. Potential sellers have been leery of making deals during what they consider a temporary dip, creating an often unbridgeable gap with interested buyers.
Many companies have instead turned to the stock markets to raise cash and bolster their balance sheets.
That calculus could change if Shell and BG merge. A deal of this size could inspire some wavering would-be sellers to pursue deals. Advisers say they expect merger activity to pick up this year, particularly once oil prices show more stability.
Consolidation could allow oil companies to cut costs and bulk up their presence in attractive sources of oil and gas.
BG would be Shell's biggest deal by far. The company's largest acquisition to date was its purchase of a 22 percent stake in Shell Canada for about $7 billion.
BG had long been rumoured to be a takeover candidate, but recent troubles may have made it vulnerable. The company has been unable recently to fulfill its export commitments of liquefied natural gas from Egypt because the Egyptian government has taken too much gas for domestic consumption.
BG reported a $1.1 billion loss in 2014, largely because of write-offs as a result of lower oil and gas prices.
BG has also experienced leadership turmoil recently. Last year, the company's chief executive, Chris Finlayson, resigned suddenly and was replaced by Mr. Lund.
Shell also has a fairly new chief executive in Mr. van Beurden, who took the helm in 2014, has been selling assets and has been cutting costs after a series of poor performances. The company is also preparing for an expensive campaign opposed by environmental groups to drill off Alaska.
Last year, the company reported income of about $15 billion, a fall of about 8 percent from a year earlier. Mr. van Beurden has clearly identified liquefied natural gas, which makes a strong contribution to Shell's earnings, as a business he wants to bolster.
BG, which was once part of British Gas, is particularly attractive to Shell because it is a major player in liquefied natural gas, whose use is growing fast despite a recent slump in prices.
To make gas a global commodity, companies are increasingly cooling it into liquid form, shrinking its volume for transportation on specialised ships. Shell has invested tens of billions of dollars in liquefied natural gas production plants, storage terminals and related systems in recent years, building itself into a global leader.
Ben van Beurden, the chief executive officer of Shell, appears to be calculating that low oil prices offer an opportunity to gain assets at a comparatively low cost, despite the premium Shell has offered to pay for BG.
In a call with reporters on Wednesday, van Beurden said that the current period of low oil prices was analogous to the doldrums of the late 1990s, when industry executives like John Browne of BP began a wave of mergers.
In recent years, the oil majors have fallen out of favour with investors as a result of rising costs, falling returns and poor success rates in exploration. Their share prices and earnings have been battered by a roughly 50 per cent drop in oil prices since June.
By acquiring BG, Shell hopes to further increase scale and profit in two areas in which it is already a global leader. The first is liquefied natural gas, a sector that is expected to grow as Asia, particularly China, burns more gas to fuel economic growth and to reduce air pollution from coal. The second is deepwater drilling, most significantly for oil, an area in which Shell is already a leader, including in the Gulf of Mexico and off Nigeria.
BG would also bring to Shell a strong position in Brazil, which is expected to become a leader in production, despite problems at Petrobras, the state oil company.
Shell estimates that the combined company has the potential to increase production in Brazil tenfold, to 550,000 barrels of oil and gas a day.
Shell said the deal would add 25 per cent to its proven reserves of oil and gas and would increase production by 20 per cent, bolstered by BG's Brazilian holdings and its liquefied natural gas project in Australia. Shell expects the deal to yield pretax annual savings of about $2.5 billion.
Shell said that it would pay for the acquisition with a mix of cash and stock, with BG shareholders receiving 383 pence a share in cash, and 0.4454 B shares in Shell for each BG share held. BG shareholders would own 19 per cent of the combined company.
The price is a 50 per cent premium to BG's closing share price on Tuesday. BG shares have fallen about 30 per cent since global oil prices started their steep slide in June.
Shell investors were far less enthusiastic about the deal than BG shareholders were: Shares in Shell fell about 5 per cent, and BG's stock soared about 37 per cent in morning trading in Europe.
"Bold, strategic moves shape our industry," Mr. van Beurden of Shell said in a statement. "BG and Shell are a great fit."
He continued, "This transaction fits with our strategy and our read on the industry landscape around us."
Mr. van Beurden said that Shell had been scanning takeover opportunities, with BG "always at the top of the list." Mr. van Beurden said that he initiated the deal by calling Andrew Gould, BG's chairman, and that "a very good discussion" ensued.
Mr. Gould said during the same call that he and the BG chief executive, Helge Lund, were looking forward to turning BG around. Mr. Gould said that Mr. Lund, a former chief executive of Statoil of Norway who took the helm of BG in February, would assure a smooth transition and then "probably move along."
If completed, the sale would be a rare bright spot for energy deal makers, as oil and gas companies have largely hunkered down while petroleum prices have plunged. Potential sellers have been leery of making deals during what they consider a temporary dip, creating an often unbridgeable gap with interested buyers.
Many companies have instead turned to the stock markets to raise cash and bolster their balance sheets.
That calculus could change if Shell and BG merge. A deal of this size could inspire some wavering would-be sellers to pursue deals. Advisers say they expect merger activity to pick up this year, particularly once oil prices show more stability.
Consolidation could allow oil companies to cut costs and bulk up their presence in attractive sources of oil and gas.
BG would be Shell's biggest deal by far. The company's largest acquisition to date was its purchase of a 22 percent stake in Shell Canada for about $7 billion.
BG had long been rumoured to be a takeover candidate, but recent troubles may have made it vulnerable. The company has been unable recently to fulfill its export commitments of liquefied natural gas from Egypt because the Egyptian government has taken too much gas for domestic consumption.
BG reported a $1.1 billion loss in 2014, largely because of write-offs as a result of lower oil and gas prices.
BG has also experienced leadership turmoil recently. Last year, the company's chief executive, Chris Finlayson, resigned suddenly and was replaced by Mr. Lund.
Shell also has a fairly new chief executive in Mr. van Beurden, who took the helm in 2014, has been selling assets and has been cutting costs after a series of poor performances. The company is also preparing for an expensive campaign opposed by environmental groups to drill off Alaska.
Last year, the company reported income of about $15 billion, a fall of about 8 percent from a year earlier. Mr. van Beurden has clearly identified liquefied natural gas, which makes a strong contribution to Shell's earnings, as a business he wants to bolster.
©2015 The New York Times News Service