Chris Blackhurst: Shell and BG’s £47 billion merger could really pay dividends

CHRIS BLACKHURST: 6 JAN 2016

No sooner are we into the new year than the stage is set fair for a classic showdown between City short- and long-termism.

This will be on January 27 and 28 when the shareholders in Shell and BG vote on the companies’ proposed £47 billion merger.

Until recently, and the fall in the oil price, I would have said it was a dead certainty the deal would get the nod.

Ever since 1997 when British Gas divested Centrica and became BG, Shell has thought of combining.

The industrial logic is compelling, the joint savings would be enormous, but Shell never did do much in a hurry.

However, in present chief executive Ben van Beurden, it has someone in charge with the determination and toughness to drive it through. 

But while van Beurden has done a terrific job in persuading all the regulators to give the marriage the go-ahead, even he and his formidable array of advisers have not been able to influence the oil price.

With the cost of a barrel close to an 11-year low, some Shell investors are fearful their traditionally handsome dividend will be consigned to the past. 

Not only is Shell already making deep cuts in order to maintain the payout, but it will also have to absorb BG.

This, against a backdrop of Brent crude promising to head even lower — from the current $35 a barrel to $20, says Goldman Sachs.

Given that the break-even of the BG tie-up is predicated on $60 a barrel, the investors’ alarm is understandable.

Find more statistics at Statista

From being able to rely on Shell’s dividends, they could go to a situation of depressed oil prices, merger hell, shattered profits and a vastly reduced divi.

The promised returns from the disposals from a combined Shell-BG may not emerge as prices across the industry plummet. 

To borrow a precedent from the banking crisis, where a good bank, Lloyds, joined with another, HBOS, and the result was one enormous bad bank, the same could happen here.

The fear is that van Beurden — spurred on by his advisers, who are being paid £106 million in fees — is ignoring the wider picture, convinced that for his group big really is best when it may not be so. 

That analysis, however, is based on the short term. It only works if oil remains so cheap. I don’t possess a crystal ball but is it realistic to expect crude to stay so low and for so long?

Van Beurden is talking of the benefits of the merger still being felt in 25 to 30 years’ time.

No one, surely, is predicting with any certainty that oil will not have bounced back well before then. 

The return of Iran to the energy markets has skewed calculations. It’s true the Iranians don’t care if Saudi Arabia wishes to push up prices — even truer since the latter’s execution at the weekend of Shia cleric Sheikh Nimr al-Nimr and the rising tension between the predominantly Shia Iran and Saudi.

And yes, the nearing of US oil self-sufficiency negates the power of Opec and the Middle East producers to dictate prices. 

But even so, how likely is it that crude will stick at $35 and below? It was only in the summer of 2014 that a barrel was $115. To suggest the price may climb again to $60 must be reasonable.

Shell is pledging a dividend of $1.88 a share for 2015 and 2016. After that, it cannot commit — and that is spooking some investors. But imagine if Shell was on its own and oil remains low. Would it be in a better position than if it had merged with BG? It would be struggling to produce the same level of dividend.

With BG, however, it could be in a more robust place. BG has a divi of its own. 

To return to the banking comparison, it is no HBOS. It’s true that traditionally BG has not been a big payer but that’s because it has been investing in new projects in Queensland and Brazil.

Those schemes are coming on stream and should produce cash that will support Shell’s ability to pay its dividend.

As a recent UBS note put it: “We believe BG provides valuable free cash to support the payout…”

The rounds of shareholder presentations could become increasingly frantic in the next three weeks.

Van Beurden is thought to have already persuaded the Qatar Investment Authority, Old Mutual, Axa, Henderson, Investec and Alliance Global. That’s a heavyweight list, but it’s not enough. He needs 50% approval.

My guess is that he will succeed, that short-term worries over the oil price and dividend will be won over by the prospect of long-term vision bringing larger rewards.

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