By Ron Bousso
LONDON (Reuters) - Royal Dutch Shell's
Standard Life Investment's announcement came on the same day influential shareholder advisory firm Institutional Shareholder Services (ISS) endorsed the deal, saying the downturn in oil markets did not detract from its strategic benefits.
The first public sign of dissent from a key investor was unlikely to scupper Chief Executive Ben van Beurden's drive to win the required shareholder support in a Jan. 27 vote.
Few investors or analysts have openly challenged the deal's strategic benefits for Shell, which will become the world's top liquefied natural gas trader and a major offshore oil producer.
But with crude oil prices languishing near 12-year lows of around $34 a barrel and forecasts of a slow recovery, investors have raised concerns about the viability of the cash-and-share deal that would increase Shell's debt burden.
"We have concluded that the proposed terms of the acquisition of BG are value destructive for Shell shareholders," David Cumming, head of equities at Standard Life Investments, said in a statement.
"This view is based on the downside risks to Shell's oil price assumptions plus the tax and operational risks surrounding BG's Brazilian asset base. Consequently we shall vote against the deal."
A purchase of BG will increase Shell's exposure to risks in Brazil which is suffering its worse recession in decades. It will also bring Shell into closer partnership with Petroleo Brasileiro SA
The state owned oil company is in the middle of a giant price-fixing, bribery and political kick-back scandal. Its nearly $130 billion of debt is also the largest of any oil company in the world and it faces increasing difficulty paying for massive offshore investments, many of them with BG.
Standard Life is the 11th largest holder of Shell's B shares with a 1.7 percent stake. Shell B shares make up the share component in the cash-and-share acquisition that is expected to be completed on Feb. 15.
COMPELLING RATIONALE
ISS, which advises around 5 percent of Shell's medium and small shareholders, said they supported the deal "given the compelling strategic rationale, and the significant positive economics to be realised within a relatively short time frame."
The current low oil price "may be of very little value in assessing the strategic opportunity of a transaction whose benefits will be realised over decades," ISS said in a report.
Shell remained confident of winning the vote. "We continue to believe we have the broad base of shareholder support we need for the deal to complete," a Shell spokesman said.
Guy Jubb, head of governance at Standard Life Investments, urged Shell to renegotiate the deal, announced last April.
On Wednesday, Chief Financial Officer Simon Henry told analysts Shell had conducted stress tests that showed it could withstand oil at $50 a barrel over the next two years, its lowest estimate to date as it seeks to secure shareholder support, sources told Reuters.
To weather such an environment, Shell plans to cut capital spending further below the planned $33 billion for 2016, delay share buybacks and extend scrip dividends, where investors are offered discounted shares instead of cash, Henry told analysts.
ISS said that the combination would allow Shell to replenish oil and gas reserves, lower production costs and ensure dividend cover "at what seems an opportunistic point" due to BG's financial profile and the oil market's cycle.
"There is credible evidence... that the price Shell is paying is reasonable even considering the decline in oil prices and oil stocks since the deal was announced."
Royal Dutch Shell B shares were down 5.9 percent at 1757 GMT, compared with a 3.65 percent decline for the broader sector index. <.SXEP>
(Reporting by Karolin Schaps; Editing by Alexander Smith, Adrian Croft and Bernard Orr)
