Shell says can make BG deal work despite weak oil price

Shell said it would reduce its costs by $11 billion in 2015 as it tackles a prolonged period of lower oil prices

Royal Dutch Shell sought to ease investor concerns over its planned $70 billion takeover of BG Group , announcing plans for further benefits and cost cuts aimed at making the deal work with oil prices in the mid-$60s a barrel.

The Anglo-Dutch group, which hopes to complete the deal early next year, said it now expected synergies to increase by $1 billion to $3.5 billion for the combination which will make Shell a leader in liquefied natural gas (LNG) and offshore oil production in Brazil.

Shell, which last week reported a huge third-quarter loss due to $8 billion of write-offs in Alaska and Canada, said it would reduce its costs by $11 billion in 2015 as it tackles a prolonged period of lower oil prices, currently trading below $50 per barrel.

 

"Shell is becoming a company that is more focused on its core strengths, a company that is more resilient and competitive at all points in the oil price cycle and that has a more predictable project development pipeline. We'll grow to simplify," Chief Executive Officer Ben van Beurden said in a statement ahead of a company strategy day in London.

Investors have been concerned that the benefits from the deal would be at risk as a recovery in oil prices is now expected to take much longer than foreseen in April, when the merger with BG was announced.

Back then, Shell indicated it expected oil prices to recover to $90 a barrel by 2020.

BG shares currently trade at a discount of more than 10% to the valuation of the cash and shares deal, reflecting investor concerns over its viability and remaining regulatory hurdles. Shell awaits the approval of Australian and Chinese regulators before the deal can be put before shareholders.

Shell shares traded nearly 1% higher at 0905 GMT, higher than the European oil and gas sector that was up 0.5%. BG shares were up 1.3%.

OIL LOWER, FOR LONGER

"No real new surprises today. We expect more in terms of pre-tax synergies once the two groups combine," said Brendan Warn, Managing Director of International oil & gas equity research at BMO Capital Markets.

"Shell's commitment to operate at a lower oil environment and maintain share buyback may reduce some investors' concerns."

BMO rates Shell as "underperform".

Brent crude traded at around $59 per barrel when the deal was announced and has since traded in a range between about $42 and $69 amid a growing consensus among analysts that prices are set to stay "lower for longer".

"Since April, the prevailing market view on oil prices has fallen by $10-$15 per barrel on average over the period to 2018," Shell said in the statement.

"Despite this, Shell's assessment of the expected accretion for both cash flow from operations per share and earnings per share... and plans for share buy backs remain unchanged."

Shell previously announced a sharp reduction to its 2015 capital spending programme to $30 billion as well as 7,500 job cuts. The combined group's capital spending is expected to reach $35 billion next year.

The company reiterated its plans to sell $50 billion worth of assets between 2014 and 2018 in order to cover the cost of the acquisition and as Shell focuses its portfolio.

Shell said it would maintain its dividend payout in 2015 and 2016 at $1.88 per share, turn off scrip dividends in 2017 and undertake a share buyback of at least $25 billion in the period 2017-2020.

The $3.5 billion synergies were expected to comprise of $2 billion savings in operating costs, mainly in the corporate and IT and another $1.5 billion in exploration spending in 2018. The implementation of the cost savings will however result in a one-off charge of $1.23 billion.

"The BG deal will make will Shell a far better company beyond 2017, but until then a lot of divestments and levers need to be pulled to cover dividend," Warn said.