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Royal Dutch Shell to Buy BG Group for Nearly $70 Billion Royal Dutch Shell to Buy BG Group for Nearly $70 Billion
(about 14 hours later)
LONDON — 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. LONDON — Energy companies have spent months in a state of strategic paralysis, wary of making big moves with oil prices plunging.
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. Now, the mind-set is shifting, as the industry giants look to capitalize on the weakness.
To make gas a global commodity, companies are increasingly cooling it into liquid form, shrinking its volume for transportation on specialized ships. Shell has invested tens of billions of dollars in liquefied natural gas production plants, storage terminals and related systems in recent years. On Wednesday, Royal Dutch Shell agreed to buy the BG Group for $70 billion. It is the first major deal for an oil and gas producer since prices started falling last summer.
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. The acquisition could provide a template in the current environment, with deep-pocketed players taking advantage of their competitors’ problems to bolster their own position.
In a call with reporters on Wednesday, Mr. 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 buying BG, Shell is concentrating on the fast-growing business of producing and selling liquefied natural gas. It will also become a major player in Brazil’s offshore oil fields, where Shell’s exposure has been small.
In recent years, the oil majors have fallen out of favor 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 percent drop in oil prices since June. Shell is taking advantage of the financial struggles of BG. Before the deal was announced, BG had watched its shares fall more than 30 percent since May.
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, including in the Gulf of Mexico and off Nigeria. Liquefied natural gas “is a very very important component of this,” Ben van Beurden, Shell’s chief executive, told reporters on Wednesday. “It is really the strength of both companies.”
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. Deal makers have predicted that the plunge in oil prices could spark interest among would-be acquirers eager for bargains. Other potential buyers, like private equity firms, have amassed billions of dollars to hunt for new trophies.
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. Many of these bankers and lawyers, though, have cautioned that would-be sellers may find other ways to raise money, rather that risk auctions at fire-sale prices. For example, Whiting Petroleum, a midsize oil and gas company, chose to raise $2 billion in debt and sell 35 million shares after failing to draw an attractive takeover offer.
Shell said the deal would add 25 percent to its proven reserves of oil and gas and would increase production by 20 percent, 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. But the attractions of energy mergers — including the benefits of greater scale and the ability to move into productive fields of oil and gas — may ultimately compel many players to the negotiating table.
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 percent of the combined company. Shell, in large part, is betting on a changing international energy market.
The price is a 50 percent premium to BG’s closing share price on Tuesday. BG shares have fallen about 30 percent since global oil prices started their steep slide in June. As global energy needs have soared, companies are looking to liquefied natural gas, or L.N.G., to meet the demands. The process involves supercooling natural gas into a liquid that can be transported around the world on ships. By doing so, natural gas has become a global commodity, with companies bringing supplies from remote locations in Africa to energy-hungry markets like China and India.
Shell investors were far less enthusiastic about the deal than BG shareholders were: Shares in Shell fell about 7 percent, and BG’s stock soared about 31 percent in afternoontrading in Europe. L.N.G. is often used to meet peak energy demand in Persian Gulf countries like Dubai and Kuwait to power air-conditioning in the summer. Britain uses it to meet peak demand during the winter heating season.
The companies expect the deal, which requires shareholder and regulatory approval, to be completed early next year. L.N.G. also has the potential to reduce the leverage that pipeline gas suppliers have over their customers. Lithuania, for instance, has built an L.N.G. facility to ease its dependence on Russian gas. Poland is working on a similar plant.
“Bold, strategic moves shape our industry,” Mr. van Beurden of Shell said in a statement. “BG and Shell are a great fit.” With the technology taking hold, global L.N.G. surged rapidly in the early 1990s. But demand leveled off in recent years, tempered by weak economic growth, high prices and a lack of new supplies. Many forecasters expect the business to bounce back, growing in the high single-digits over the next decade.
He continued, “This transaction fits with our strategy and our read on the industry landscape around us.” “The long-term expectation is for a resumption of rapid growth because of fundamentals and in response to current low prices,” said Christopher Goncalves, head of the energy practice at the Berkeley Research Group, a consulting firm based in Washington.
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. More than any of its rivals, Shell has staked its future on natural gas, L.N.G. in particular. Over the last decade, Shell has invested $56 billion in the cooling plants, terminals and other facilities required to produce L.N.G. and other gas-derived fuels.
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.” When Repsol ran into trouble in Argentina, Shell swooped in to purchase the company’s well-regarded L.N.G. business for $5.4 billion. Shell is also developing a large floating L.N.G. installation, called Prelude, to process the output of a gas field off Australia.
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. With the purchase of BG, Shell is building on that base, adding to existing projects in places like Trinidad and Australia. The deal will enhance the portfolio as well, with BG’s gas discoveries off Tanzania in East Africa, a future growth area where Shell has been unable to establish a foothold.
Many companies have instead turned to the stock markets to raise cash and bolster their balance sheets. Both companies are positioned to benefit from the shale gas boom in the United States. BG has a contract to buy L.N.G. from a facility called Sabine Pass on the Gulf of Mexico, owned by Cheniere Energy. Shell has an interest in a facility planned for an island off Georgia.
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. The greater scale and additional sources of supply should provide an advantage for Shell. The company, already considered a sophisticated L.N.G. trader, would be able to further define its shipping routes and send cargoes to destinations offering the highest price, wherever they are.
Consolidation could allow oil companies to cut costs and bulk up their presence in attractive sources of oil and gas. So far, the big push into L.N.G. has proved a blessing for Shell, particularly at a tough time for its oil business as well as its refining units. Last year, the company reported $11.3 billion in earnings from L.N.G. and related businesses, about 75 percent of its overall income. By adding BG, Shell expects to increase its L.N.G. capacity by 73 percent in the next three years.
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, by comparison, has been going through a rocky period since the sudden departure of its chief executive, Chris Finlayson, last year. The company has been particularly hurt in recent months by its operations in Egypt.
BG had long been rumored 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. To satisfy growing demand stoked by cheap subsidized energy prices, the country’s government, also facing social unrest, diverted the company’s production for domestic purposes. As a result, BG couldn’t get sufficient gas supplies to meet its L.N.G. export commitments.
BG reported a $1.1 billion loss in 2014, largely because of write-offs as a result of lower oil and gas prices. Since the departure of Mr. Finlayson, Andrew Gould, BG’s chairman, has largely been steering the company. Helge Lund, a former chief executive of Norway’s Statoil, took the helm of BG about two months ago.
BG has also experienced leadership turmoil recently. Last year, the company’s chief executive, Chris Finlayson, resigned suddenly and was replaced by Mr. Lund. Mr. Gould, a former chief executive of the energy technology company Schlumberger, took the lead, negotiating the deal directly with Shell’s chief, Mr. van Beurden.
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. Mr. van Beurden said at a news conference on Wednesday that after Shell decided to move ahead with the deal, he called Mr. Gould and the two met on March 15 in London, where “we had a very good discussion.”
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. Mr. Gould told reporters that he and Mr. Lund had looked forward to turning around BG. But when the board and Mr. Lund looked at the Shell offer, they found it too compelling to pass up.
Investors, though, have viewed the deal skeptically, at least initially. Shell’s stock price was off more than 5 percent on Wednesday. The main knock is the 50 percent premium that Shell is paying over BG’s Tuesday closing price, although the stock is well off its high.
A more fundamental concern may be that L.N.G. prices are under pressure from a variety of factors, including oversupply in the market and weaker-than-expected growth in demand from countries like China. Asian spot prices, for instance, have fallen by nearly 50 percent from their 2014 highs.
Most L.N.G. is sold under long-term contracts, whose terms are usually not disclosed. But because they are linked to oil, usually with a several-month time lag, they are also coming down.
That will put pressure on Shell’s profits, particularly on L.N.G. from the high-cost Australian projects to which both Shell and BG have substantial exposure.
“We believe that Shell will have to work very hard to convince shareholders that the strategic benefits outweigh the premium offered,” Iain Reid, an analyst at BMO Capital Markets, a Canadian bank, wrote in a note to clients on Wednesday.