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Royal Dutch Shell plc Shareholders Express Concern Over Dividends After BG Group Merger

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By: MICHEAL KAUFMANPublished: Apr 10, 2015 at 9:39 am EST

A $70 billion merger deal between Royal Dutch Shell plc (ADR) (NYSE:RDS.A) and BG Group plc (ADR) (OTCMKTS: BRGYY) was finalized earlier during the week. Shell had paid a premium of 50% on BG Group’s share price on April 9. Many have commended the efforts of Shell CEO Ben van Beurden for going through with the deal.

The deal holds great benefits for Shell and will allow the company to access BG’s cash-rich assets to become the global leader in liquefied natural gas. The oil company had been finding it hard to replace its oil and gas reserves but the merger with BG would solve this problem. While the deal brings in benefits, it raises some concerns among the shareholders, who have expressed worries regarding dividend payouts.

Shell paid a hefty premium for the company. In addition, crude oil price since the last nine months has fallen 50%. Amid the dropping crude oil price, major energy companies such as Chevron Corporation (NYSE:CVX), BP plc (ADR) (NYSE:BP), and Exxon Mobil Corporation (NYSE:XOM) have announced major cutbacks in capital spending and asset divestitures. Shell aims on selling assets worth $30 billion.

According to the Financial Times, the asset sales along with the cost cuts would not be enough to sustain dividends in the long run. Many expect that the only way the oil company is to maintain steady flow of dividends post-merger would be thorough a re-bound in crude oil price.

During the pre-market hours today, as of 5:34AM EST, the US benchmark for crude oil, West Texas Intermediate, was trading at $50.28 per barrel, while the global benchmark for crude oil, Brent crude at the same time was trading at $56.34 per barrel.

Many believe that the Brazilian reserves that Shell would obtain through the merger would not be profitable with crude oil trading around $50 per barrel. To predict the future of crude oil price, there still remains a challenging task. Analysts estimate the price to stabilize by the second-half of 2015. If price was to stabilize and reach $90, then Mr. Beurden would be considered a great visionary but no one is known to have an idea of what the price would be in the future.

Amid the falling crude oil price scenario, Shell and other energy companies will have a tough time ahead of maintaining liquidity and enough cash to ensure that adequate dividends are distributed to their shareholders. Shell stock due to dividend concerns has fallen 10% in the last one week.

Shell shares closed down 0.72% yesterday at $59.40.

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