Impact of falling oil prices: Shell acquiring BG for $70 billion

ARC has been opining that one of the impacts of falling oil prices would be an increase in mergers and acquisition activity and/or an increasing number of partnerships or joint ventures. One of the biggest M&A deals in recent history was recently announced as Royal Dutch Shell plc has agreed to acquire BG Group PLC in a $70.1-billion cash and shares deal intended to sharpen Shell?s focus on integrated gas projects and deep water. If the transaction is approved by shareholders and completed, existing BG shareholders will own about 19% of Shell. It means Shell would be buying the company at a major premium of 50% based on the Reading, UK based company?s share price on April 7.

The merger, the largest this year, consolidates the UK?s largest and third largest gas companies into one; with a market capitalization of $246 billion.

Shell said the acquisition would increase its proved oil and gas reserves by about 25% and its production by 20%. In its 2014 annual report, BG estimated its natural gas reserves at 11.55 Tcf proved, 5.8 Tcf proved and developed, and 9.25 Tcf probable under the Society of Petroleum Engineers assessment method. It estimated oil reserves at 1.69 billion bbl proved, 537 million bbl proved and developed, and 1.37 billion bbl probable. BG in 2014 produced 606,000 boe/d of oil and gas in Australia, Bolivia, Brazil, Egypt, India, Kazakhstan, Norway, Thailand, Trinidad and Tobago, Tunisia, the UK, and the US.

The deal materialized against a background of falling gas and crude oil prices; over 50% since June 2014. It?s expected to eliminate overlapping costs and help safeguard the companies against declining commodity prices. Shell would also break into Australia and countries in east Africa, Latin America, and central Asia.

The merger would help to stabilize both companies, especially BG, who would benefit from having the support of a stronger partner. While Shell was able to operate, pay dividends and maintain capital at a price of $75 per barrel of crude, BG found it more difficult. The deal is now expected to generate pre-tax synergies of around ?2.5 billion. Shell aims to sell assets worth $30 billion during between 2016 and 2018.