Back in April when Shell made what was then a £47bn offer for BG Group, it seemed quite clever. Consolidation often happens when the market is in a downturn after all, as big firms smell rare opportunities to gobble up smaller rivals on the cheap. Now though, with all regulatory hurdles passed and barely weeks to go before shareholders in both firms vote on the deal (now worth more like £33bn), its rationale seems less assured.
Oil is at a 12-year low of $28 (£19.30) a barrel – half what it was in April 2015 – and there’s precious little sign of it recovering any time soon. US production hasn’t fallen yet despite sustained price pressure from the Saudis, who appear willing to sell off chunks of their only real asset, Aramco, to keep it up. The International Energy Agency meanwhile is warning that the world could ‘drown in oversupply’ once Iran re-enters the market.
Unsurprisingly, this is hitting oil profits hard. Three months after Shell wrote down $6bn worth of assets (who wants an oil well when the stuff sells for less than water?), it has predicted full year earnings of between $1.6bn and $1.9bn – as much as 54% lower than in 2014. Shares in the company promptly fell 5.4% this morning to £12.95.
In that context, does it really make sense still for Shell to take on additional debt for the £13bn or so in cash that it intends to pay BG shareholders for the company, alongside a sack full of its own stock? Shell chief exec Ben van Beurden may well have a point when he talks about the ‘synergies’ the combination could make, above and beyond the $4bn in savings the firm has already made and $3bn it intends to make this year. But shareholders could well be too concerned about the likely dilution of their dividends to dwell on that.
If the deal has become less palatable for Shell’s shareholders (50% of whom must approve it), the same could also be said for BG’s. In April, Shell offered them a 58% premium for their stock, but with the larger company's shares falling much further since then, the offer now amounts to barely 5% more than the current price of £9.17. All this may well have been priced into the market value, but it’s food for thought for BG shareholders, three-quarters of whom need to consent.
Then again, its results aren’t looking quite as ‘excellent’ as boss Helge Lund is saying. Yes it’s expected to beat expectations with earnings of $2.3bn, compared to a $1bn loss in 2014. But, given that it made just over $2.3bn in the first nine months of 2015, this seems to indicate that it will have made precisely no money in the last three months of last year. That could be largely explained by a $0.5bn net impairment, but it’s hardly raking it in.
Most indications are that the deal will go ahead though – despite the timing, Shell will still gain access to BG’s diverse and expanding upstream portfolio and BG will still gain the security of being part of a true giant, which also happens to be generous with its dividends. Just don’t be surprised if doubter Standard Life isn’t the only dissenter.