Shell's takeover of BG - what the analysts say

Royal Dutch Shell's £47bn deal to acquire BG Group at a hefty premium has prompted industry analysts to herald a new round of consolidation in the energy sector, following the collapse in the oil price.

However, some have questioned the assumed recovery in the oil price used to underpin the valuation methodology, and suggested it is a better deal for shareholders in BG than in Shell.

Here is a selection of analyst comments.

Neil Morton, analyst, Investec:

"Shell's bid for BG Group is proof that if you repeat a rumour long enough, it might eventually come true. A tie-up has been mooted for about 20 years. BG investors receive what we see as a compelling offer. For Shell shareholders, we are less convinced of the merits. The deal is predicated on a strong recovery in oil prices ($90/bl from 2018), while we suspect that Shell is pouncing on BG's imminent free cash flow to protect its burdensome dividend payout.

"Shell is arguing that BG's prize assets in deepwater Brazil (where Shell has limited presence) and LNG in Australia (where Shell arguably is overexposed) will augment its quality and cash generation. However we suspect that, with BG on the cusp (finally!) of FCF generation and a new chief executive settling in, Shell thought the timing propitious.

"BG has struggled to shake off the perception that in developing Brazil and Australia it bit off more than it could chew. New chief executive, Helge Lund, (or, perhaps more likely, chairman Andrew Gould) has accepted that BG's asset base is more suited to a company with deeper pockets."

Stephane G. Foucaud, FirstEnergy

"The premium is very large which highlights the value that the industry sees in the sector. I would not be surprised if we see other super majors and majors following Shell moves and also going for acquisitions. This is usually what happened in the past. Once one of the big players pulls the triggers, then the others (BP, Total, Chevron and ExxonMobil) follow suit. They are likely to look for materiality with large independents as target.

"Shell's acquisition of BG is big on Asian gas because it [east Africa and Australia] fits its portfolio. It does not mean that Asian gas would also be the focus for the other large companies. I personally believe that North American shale could also be an area of focus for a targeted acquisition."

Biraj Borkhataria, analyst, RBC Capital Markets:

"The key attractions for Shell are BG's deepwater assets in Brazil and its LNG portfolio. BG's LNG portfolio combined with Shell's would represent circa 40m tons per annum or roughly 16 per cent of the global LNG market, further propelling Shell's position as a leader in this area.

"In addition, Shell would acquire significant growth options including Tanzania and Lake Charles LNG. In Brazil, BG's assets would give Shell a further foothold in one of the lowest cost basins in the world, and could add potential synergies with Shell's Libra assets."

Michael J Alsford, analyst, Citi:

"We have long believed that BG's portfolio has offered low-cost growth, primarily from Brazil. Brazil will represent around 60 per cent of BG's upstream cash flows by 2020.

"The LNG portfolio fits into the wider Shell portfolio - in addition to its material position in Brazil, BG has a material LNG business including . . . QC LNG in Australia, which should fit well into Shell's LNG business and enable Shell to monetise its own unconventional gas resources in Australia."

Augustin Eden, analyst, Accendo Markets:

"Royal Dutch Shell is to purchase BG Group for about £47bn in cash, which would be the 14th largest M&A transaction in history, indicating the likelihood of another oil & gas M&A party like the one seen in the late 1990s."

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