By: MICHEAL KAUFMAN: Published: Apr 10, 2015 at 6:22 am EST
In a report published on Thursday, Credit Suisse commented on the aftermath of Royal Dutch Shell plc’s (ADR) (NYSE:RDS.A) announcement to acquire BG Group Plc (ADR) (OTCMKTS:BRGYY). The sell-side research firm deliberated that the transaction makes sound strategic sense and moves Shell down the cost curve. The firm reiterated an Outperform rating on the stock.
Although the announcement comes with a rich valuation, Credit Suisse does not expect any counter-bid unless someone uses Shell’s internal planning assumptions. The new company might eclipse Exxon Mobil Corporation (NYSE:XOM) as the largest publicly traded producer by 2018, and will be a less capital-intensive version “of its former self” with greater scale and scope around key focus areas.
Shell, however, may be in a “penalty box” in the short run as its works through its elevated gearing once the deal is concluded by early 2016, as expected.
Credit Suisse analyst Thomas Adolff said that balance sheet strength and superior development capability is a source of value creation. This becomes more significant when one acquires a financially constrained company that possesses a portfolio of high-quality but stranded assets.
This is not the case with BG Group aside from its liquefied natural gas (LNG) assets. BG Group passed its heavy spend and is about to reap the fruits of its labor; however, some development risk in Brazil remains.
Mr. Adolff said: “Instead, BG’s portfolio allows RDS to reprioritize investments, leading to disposal of assets previously considered higher up in the pecking order, which is the second, but more complicated, way to create a stronger/focused version of its former self.”
The Street is slightly bullish on Shell. Out of the 14 analysts who cover the stock, seven suggest a Buy and six recommend a Hold. The 12-month average target price is $70.13, which reflects an upside potential of 18% over the last closing stock price.
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