QIA bullish on Shell-BG proposal
Qatar's state investment vehicle QIA has hedged its bets with the Shell-BG proposed takeover
Sovereign wealth funds’ responses to the proposed takeover of UK BG by the Anglo-Dutch major Shell were generally low-key. The deal is working its way through the relevant regulatory processes and the US anti-trust agency gave the deal its greenlight 17 June.
Norges Bank Investment Management, the arm of Norway's central bank that manages the $861bn Government Pension Fund Global, added BG shares to its portfolio, which also includes a 5% stake in Shell. China's State Administration of Foreign Exchange, an arm of the People's Bank of China that has about $500bn under its belt to invest in non-treasury assets, played the markets more modestly, cutting its stake at a profit after BG's share price jumped.
But these transactions paled in comparison to a huge play by the Qatar Investment Authority, which has an estimated $304bn under management. Filings to the London Stock Exchange in the days following the takeover suggest that the Qatari fund bought 67m shares in Shell (2.75%) and 12m in BG (0.39%) in the wake of the deal, for a combined outlay of $2.3bn.
QIA has had a busy 2015 to date, with multi-billion dollar deals for 8 Canada Square and the wider Canary Wharf financial district.
QIA, which is among the most opaque of the major sovereign wealth funds, is clearly bullish on the Shell-BG merger. Whether it's wise for a state-owned investor from a hydrocarbon-dependent economy to pour such sums into oil and gas is another matter.
The market seemed to think Shell had overpaid and its shares tumbled on the day of the announcement, closing at £20.84, down 5% on 7 April. BG shares were up 40%, at £12.98. "It was an extremely generous valuation," says Rob West, an analyst at brokerage Redburn Partners.
Aside from the price, multi-billion dollar mergers of this type inevitably involve disruption and bring significant organizational risk and uncertainty. QIA hedged against any problems early on, buying put options on BG shares on 15 April at exercise prices ranging from £10.80 to £11.30 - well above where the shares traded before rumors of the deal surfaced. But the fund soon unwound those positions, indicating its bullish stance on BG.
The fund may have been taking the long view: owning BG would enable Shell to restructure its languishing portfolio and so achieve higher growth over the coming years. Indeed, Pascal Menges, who manages a global energy fund at Geneva-based financial services firm Lombard Odier, says the takeover "makes a lot of sense" for Shell, despite the price. "Over the last decade Shell and the other large integrated oil and gas companies were generally behind the curve when it came to investing in high-cost projects. They were late to the party in investing in shale resources in the US, for example." BG and Shell both lost money in US shale.
The merger also creates a global LNG behemoth. Redburn's West says that may be the real reason behind QIA's purchases.
"With this deal you're generating what will be the largest LNG marketing entity on the planet, with around 67m tonnes a year (t/y) of sales capacity by the time the existing project pipeline is completed," West says. "Qatar is the biggest LNG exporter in the industry and they'll be looking for a way to get access to that market, so it makes sense to seek for a linkage there. It certainly looks like Qatar has seen value in that LNG marketing capability.
QIA's $2.3bn investment looks like an element of the strategic shift signaled by Tamim bin-Hamad bin-Khalifa al-Thani, who succeeded as Qatar's emir following the abdication of his father in June 2013. The new leader was clear that he wanted to focus on putting Qatar's great hydrocarbon wealth to work in the domestic economy, instead of using QIA to promote the emirate's reputation abroad.
QIA's support for a big LNG business with strong domestic ties makes sense given Qatar's reliance on gas exports. Its LNG sales account for more than half the emirate's GDP.
What lies ahead for QIA? Having shown willingness to spend on oil and gas businesses in the face of volatile energy prices, the fund will likely be closely monitoring similar opportunities. Indeed, its investments in BG and Shell may suggest the fund is tactically positioning itself to profit from a potential surge in M&A activity across the sector.
The Shell-BG deal is certainly no one-off. Houston-based oil-field services provider Halliburton is buying its smaller rival Baker Hughes for $37.2bn. Roy Behren, a managing member at asset manager Westchester Capital, which specializes in M&A, says there will be more acquisitions. "We expect [M&A activity] to pick up at current oil and gas prices," he says, citing ExxonMobil and Houston-based ConocoPhilips as two oil majors with the "deep pockets" required for such deals.
QIA may be interested in one other integrated oil and gas company: France's oil major Total, of which it owns around 3%. Redburn's West says that, like Shell, Total faces challenges with its pipeline of projects that will stunt its ability to grow organically and force it to become more acquisitive to accelerate production growth in the new lower-price environment.
And like Shell and other majors, Total has a presence in the Qatari natural gas sector. It is part of the Qatargas consortium that operates four LNG projects across the emirate. If Total does decide to make a move for a smaller rival, it seems probable that QIA would buy shares.
For now, however, there is only QIA's mammoth bet on the BG-Shell merger, which seems to reflect both commercial and strategic imperatives. Whether it pays off will depend on Shell's success in finding the hydrocarbons and the price the world is willing to pay for them.
David Evans of Petroleum Economist sister publication Sovereign Wealth Center