Shell to Buy BG

Shell employees

Photo courtesy of Shell/Royal Dutch Shell

Shell to Buy BG
| published April 8, 2015 |

By Thursday Review staff

In a massive $70 billion merger, Shell Oil (full name: Royal Dutch Shell Ltd) has agreed to use stock and cash to purchase BG Group, a British oil, gas and energy firm. Both companies announce the merger on Wednesday, saying that the newly formed giant will have better leverage in the increasingly complex and competitive global oil markets.

The agreement would give BG shareholders a 19% interest in Shell. Once the transaction is approved by a variety of international regulators, the combined company will use the Shell name.

Shell estimates that the marriage of the two firms will generate savings and financial benefits worth $2.5 billion per year—a substantial sum in the fluid, rapidly-changing oil markets and energy sectors.

Oil prices have fallen dramatically worldwide since last summer, pushing oil and gas producers to get more creative in how they manage cash flow, pricing and profits. Numerous oil producing nations are pumping oil at record rates, flooding markets and creating a worldwide oversupply and record oil reserves. In addition, demand in the U.S. has fallen—a result of more fuel-efficient cars, better-than-expected sales of battery-powered cars, increased supply from American and Canadian shale oil deposits, and technological improvements to oil and gas distribution.

All of this has meant huge savings for most U.S. households, and the windfall may be spurring a cycle of positive economic news. But for oil companies and towns with economies linked to energy, the oil glut has created challenges. As recently as this week, business analysts and energy experts say that oil prices will continue to fall through the spring and well into the summer, with an impact at the U.S. gas pumps beginning within days.

Both Shell and BG see the merger as a good fit for these rapidly changing conditions. Oil analysts also say that Shell’s buyout of BG will enable it to compete more closely with its two larger rivals—Exxon-Mobil and BP. Shell’s merger with BG is the biggest such marriage in more than a decade. In the early aught years BP (British Petroleum) purchased Amoco and Arco, and in October 2000 Chevron bought Texaco.

Bankers and energy analysts say, however, that the Shell/BG merger makes sense in a hyper-competitive oil market. BG owns extensive drilling, energy, and exploration projects in Egypt, Australia, Kazakhstan, and Brazil, along with its holding in the British Isles. But BG’s projects in Brazil may also be problematic for the completion of the merger; Brazilian oil company Petrobras, the largest in South America, faces charges of corruption, collusion, price-fixing and phony contract, and the wide implications of the Petrobras scandal—that hundreds of politicians accepted bribes or participated in illegal or fake transactions, including President Dilma Roussef—may sully the upside to the Shell-BG merger and damage it value.

BG has also experiences problems in its Egyptian operations, where losses and lower earning have promtpted it to lower expectations, accepting a $6 billion write-down for the regional operation.

Still, most business analysts say, Shell’s merger with BG makes sense in the context of rapidly-fallen oil prices. Spokespersons for both companies put a positive spin on the announcement, suggesting that stockholders will benefit from the improved operations and the economies of scale, as well as the combined workforce.

Related Thursday Review articles:

Yemen’s Collapse: Will it Impact Oil Prices?; R. Alan Clanton; Thursday Review; March 27, 2015.

Oil Prices Stumble on Low Storage Capacity; Thursday Review; March 17, 2015.