Falling oil prices are pushing oil companies to seek mergers and acquisition deals, in a strategic move to control costs and create strength in their search for oil and gas locations. With oil prices trailing under $60 per barrel, many companies have looked to the stock market to help raise much-needed cash to keep drilling.
In the largest oil and gas merger of this decade, Royal Dutch Shell Plc (RDS.A, Financial) will acquire the British company BG Group Plc (BRGYY, Financial) in a cash and stock offer, valuing in at 47 billion pounds or $70 billion, it announced on Wednesday. Under the deal, Shell will pay BG shareholders 383 pence in cash and 0.4454 Class B shares for each BG share they hold. This reflects a value of approximately 1,367 pence for each BG Share paid at a premium of 52% from closing price on the last day of trading –Â i.e. April 7. BG shareholders will have an approximate 19% share in the resulting combined company.
Previously, Halliburton Company (HAL, Financial) acquired Baker Hughes Inc. (BHI, Financial) for $34. 6 billion, while Spanish company Repsol (REPYY, Financial) shelled out over $8 billion last year for Canadian oil company Talisman Energy Inc. (TLM, Financial).
Shares side of the story
“This is an important transaction for Shell, accelerating the delivery of our strategy for shareholders,” claimed Jorma Ollila, chairman of Shell, in the company statement. “The result will be a more competitive, stronger company for both sets of shareholders in today’s volatile oil price world. BG shareholders will receive significant value through the premium being offered for their shares. They will become shareholders in Shell, accessing an attractive dividend policy, a share in the significant synergies and the compelling upside and enhanced operating capability of the combined group. We believe that the combination is in the interests of both our companies and their shareholders.”
Along with announcing the deal, the company also announced its intentions to pay dividends of $1.88 per ordinary share in 2015 and at least the same amount in 2016. BG shareholders will enjoy the same dividend benefits, in the near term, provided the "record date falls after completion of the Combination." Trading on the London stock exchange on Tuesday saw BG’s shares climb by about 6.7%. Shell's Class A and B shares did well, with one climbing 0.73% to $61.95 and the other jumping by 1.28% to $65.46, respectively. Both are high yield stock with an EPS of $4.74.
CEO Ben van Beurden is confident that “BG will accelerate Shell’s financial growth strategy, particularly in deep water and liquefied natural gas: two of Shell's growth priorities and areas where the company is already one of the industry leaders. Furthermore, the addition of BG's competitive natural gas positions makes strategic sense, ahead of the long-term growth in demand we see for this cleaner-burning fuel. This transaction will be a springboard for a faster rate of portfolio change, particularly in exploration and other long term plays. We will be concentrating on fewer themes, and at a larger scale, to drive profitability and balance risk, and unlock more value from the combined portfolios. Over time, the combination will enhance our free cash flow potential, and our capacity to undertake share buybacks, where I expect to see a substantial increase in pace.”
Long-term growth
BG Group has significant growth assets in Australia and Brazil, giving Shell a foot in the door in the region. If the deal goes through, Shell will add 25% to its oil and gas assets and 20% capacity to production from 2014 base figures.
Being one the most massive deals in M&A history, it is an example of big oil producers taking the acquisition route to become even bigger. CNN Money qualifies them as "supermajors" of the industry, which use "their huge scale to churn out even bigger profits."
