“I am delighted with the positive shareholder vote and the confidence that shareholders have shown in the strategic logic of the combination of Shell and BG,” Shell chief executive Ben van Beurden said today, after his company’s investors voted in favour of Shell taking over UK firm BG next month.
But van Beurden’s delight must in part be born of relief. In effect, he has just survived a confidence vote, given how strongly he advocated the proposed takeover. In fact, it was his phone call to BG chairman Andrew Gould last March that triggered the whole process.
When the takeover move was announced in April last year, it was valued at $70bn. Since then, oil prices have halved, making some investors wary that Shell is overpaying for BG. But the deal comprises only £13.2bn ($18.9bn) in cash and the rest in Shell B shares, and those shares have fallen roughly in line with oil prices, bringing the deal value down by 30pc to around $50bn.
Yet, a lot of work now lies ahead for the combined group – assuming, of course, that BG shareholders support the deal on 28 January, as expected, and the transaction becomes effective next month. Shell’s gearing is expected to jump to about 25pc after the takeover from 14pc at the end of last year, requiring the company to deliver on or exceed its already announced plans to cut costs and achieve some $30bn of divestments, just at the point when low prices have pared the value of those assets.
Credit ratings agency Fitch has Shell on negative watch, reflecting “the risk the BG deal presents to the rating in the current environment, although we believe it will be positive for Shell’s business profile in the long run”.
Shell has been attracted to BG by the latter’s Australian LNG and Brazilian deepwater projects, which are high-margin assets with strong growth potential. But both come with their own challenges.
BG’s long-term LNG contracts have fallen in value since Shell first proposed the acquisition. BG’s deals with China, Singapore and Japan equate to at least 12.8mn t/yr and the LNG price is linked to the price of oil. In April 2015, the value of the contract for LNG delivery in 2017 was around $6.69bn. But with the fall in the crude price, it is now worth around $4.08bn, according to Argus calculations. Spot LNG prices have also collapsed amid a mild start to the northern hemisphere winter and additional Australian supplies pressuring the market.
And while the deal with BG makes Shell Brazil’s largest producer behind state-controlled oil company Petrobras, the latter continues to feel the pain of a corruption scandal in addition to lower oil prices. Petrobras — the major operator of offshore projects in Brazil, including those where BG has interest — has cut spending and reduced its production targets.
But the role of the individual in history could be a factor that makes at least some BG and Shell investors support the proposed deal.
“Yes, it is tough when one looks at spot oil prices and near-term futures,” Swiss bank Credit Suisse, a BG investor, has said. But “we are in the camp of ‘yes’, not just because of the strategic rationale longer term, but also because of Shell’s chief executive and chairman, who we think are the right people at the helm in this environment”.