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Shell buys BG to challenge ExxonMobil

Shell has offered to acquire BG, to create a company with oil and gas production second only to that of ExxonMobil

The acquisition will add 25% to Shell’s proved oil and gas reserves and 20% to its production, while giving the firm stronger positions in developing areas such as Australian LNG and Brazilian deep-water exploration. BG shareholders will own about 19% of the combined company.

Shell says it plans to restructure the enlarged company by selling $30bn of assets over the years 2016-18. But it says capital spending will continue to be trimmed this year and next. Debt will be paid-down in and after 2016, and there will be a $25bn share buy-back programme subsequently.

The enlarged Shell will have an oil and gas production of 3.7m barrels of oil equivalent a day (boe/d), based on 2014 production, while ExxonMobil’s output last year was 4m boe/d. Shell claims cash-flow from operations will exceed that of ExxonMobil. 

The enlarged company will have a powerful position in the LNG business, accounting for 18% of worldwide trade.  Shell’s LNG deliveries last year totalled 34m tonnes and BG delivered 11m tonnes, while world production was 246m tonnes. Shell had 26m tonnes of equity LNG production and BG had 7m tonnes, while Shell operates six regasification terminals and BG operates four. 

Shell’s chief executive, Ben van Beurden, described the acquisition as a “bold strategic move” which will allow a faster rate of portfolio change. “We will be concentrating on fewer themes, and at a larger scale, to drive profitability and balance risk”, he said. It is reported that the acquisition was driven largely by van Beurden and BG’s chairman, Andrew Gould. 

BG had 12 years of strong growth under a previous chief executive, Frank Chapman, but has been troubled since he retired at the end of 2012. The company recruited Helge Lund, former chief executive of Statoil, who took over in February. It is indicated that Lund will leave when the acquisition is completed, early next year. 

The acquisition, valued at $70bn, is the industry’s largest corporate transaction since the mergers of the 1990s which created ExxonMobil and the enlarged BP and Chevron. There have been rumours of other acquisition moves since the fall in oil prices, and ExxonMobil has stated that it interested in a deal. However, analysts say the high premium offered by Shell for BG will dissuade other parties from mounting a hostile bid.

Shell and BG have both been seeking to cut their exploration and production costs, particularly in costly but mature areas such as the UK North Sea — where Shell produces 90,000 boe/d and BG produces 105,000 boe/d. Shell says there is an “overlap” between the two companies’ UK operations — and also in Norway, where Shell produces 160,000 b/d and BG produces 28,000 b/d. The enlarged Shell is forecast to sell assets in these areas.

But Shell will benefit from BG’s production in Bolivia, India, Thailand and Tunisia, where it has no output at present. BG’s operations in these countries yield 137,000 boe/d. 

The two companies’ boards have agreed on a cash-and-shares offer which values BG at a 52% premium over its recent share price.
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