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Shell BG Group Merger Slammed

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By: MICHEAL KAUFMANPublished: May 8, 2015

The massive plunge in crude oil prices has seen a growing trend of merger activities in the oil and gas sector. Recently, Royal Dutch Shell plc. (ADR) (NYSE:RDS.A) finalized its $70 billion merger deal with BG Group plc. (ADR) (OTCMKTS:BRGYY). The lower crude oil prices pose an ideal time for energy companies to undertake investments at cheaper rates and wait for the prices to go up again.

The deal will allow the two combined company’s to becoming one of the world’s largest LNG producers. However, the massive size of the combined entity will become a sign of concern for the regulators. Thus, Shell along with BG will have to sell assets to win regulatory approval.

Famous short seller and founder of Kynikos Associates, Jim Chanos, believes that the merger deal was not a sensible decision on Shell’s part. At a hedge fund conference called SALT, Mr. Chanos blasted the deal and advised the hedge fund managers to sell Shell’s shares.

As reported by Business Insider, Mr. Chanos indicated that the deal came out of nowhere. BG is facing tough times in the current market scenario, and is highly leveraged with high replacement costs. The company not only faces liquidity issues but is also unable to cover its dividends and engage in buybacks. He further highlighted that BG does not have adequate capital even to cover its spending before dividends.

According to Mr. Chanos, the deal between these two companies is primarily based on Shell’s optimistic assumptions over the LNG market and BG’s partnership with the Brazilian state-run oil company, Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR).

Mr. Chanos believes that the LNG market’s future is not as bright as it is expected to be. The market for LNG, according to Mr. Chanos, faces disequilibrium with unequal supply and demand. In the last three years as LNG’s demand has been relatively flat. However, he expects the LNG supply to be boosted in the future. Overall, the deal is phrased as a disaster by him.

Recently, Petrobras suffered from Brazil’s largest corruption scandal. BG has a minority stake in the Rio de Jeneiro-based company. Mr. Chanos said this isn’t a good sign as it shows that it is a troubled company. “It’s far more troubled than we even thought it was a year, year-and-a-half, ago. And the corruption has proven to be deeper than we thought; they’ve got some problematic issues.”

Mr. Chanos has also expressed doubts regarding Shell’s production forecast from Brazil’s combined entity. According to Shell, if the merger takes place, then the consolidated entity would produce around 550,000 barrels of oil equivalent per day for the next ten years, which is four times as high as Shell’s current production.

Out of the 13 analysts who cover Royal Dutch Shell’s stock, five rate it as a Buy, while eight rate it as a Hold. The 12 month target price estimated by the analysts is $69.43. An Analyst from HSBC, Gordon Gray upgraded his rating to Hold.

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By: MICHEAL KAUFMANPublished: May 8, 2015

The UK-based energy company, BG Group plc (ADR) (OTCMKTS:BRGYY), soon to become a part of European oil giant Royal Dutch Shell Plc (ADR) (NYSE:RDS.A), posted its financial results for the first quarter of fiscal year 2015 (1QFY15) early Friday, to the dismay of Shell’s shareholders.

BG posted net income of $233 million from continuing operations for the quarter, down 79% from the $1.1 billion earned in the first quarter of FY14. However, adjusting for non-recurring items like disposals and impairments, the net income for the quarter came in at $565 million, compared with $1.15 billion in the same quarter last year.

The 51% decline in adjusted earnings can be attributed to a sharp decline in crude oil prices. After trading over $100 per barrel during the same quarter last year, oil prices averaged around $54 per barrel during the 1QFY15. Profitability from upstream operations took the worst hit, falling 56% as the value of oil and gas being produced fell harshly in comparison to exploration costs.

Total earnings per share (EPS) fell down 79% to 6.8 cents, whereas adjusted EPS fell 51% to 16.6 cents per share.

Revenue and other operating income fell 21% to $4 billion, compared with $5 billion in 1QFY14. Earnings before interest, taxes, depreciation and amortization (EBITDA) fell 59% as profit margins eroded. Adjusted EBITDA came in 41% lower at $1.59 billion, compared with $2.7 billion during the same period last year.

While the financial results of BG suffered as a result of low oil prices, the company maintained its operational excellence.

“We have had a solid operational start to the year. Our growth assets in Brazil and Australia continued to ramp up, with production in each more than doubling year-on-year,” said Helge Lund, Chief Executive of BG Group.

BG group received a $70 billion acquisition offer from Shell last month, implying a 52% premium over the stock’s price before the announcement was made. The company’s Board of Directors, after reviewing the proposal, recommended it to shareholders. The acquisition deal, which is the biggest of its kind in the energy sector in more than a decade, is now awaiting regulatory and shareholders’ approval, and the transaction is expected to close in early 2016, BG said in a statement.

When Shell made the bid, it cited BG’s crude oil and natural gas assets in Brazil and Australia as attractive. And those assets have shown remarkable growth during the quarter, as Mr. Lund explained on an upbeat note.

Shell’s shareholders, however, were not so happy about BG’s financial performance during the quarter. In early hours on Friday, Shell’s common shares, which trade on London Stock Exchange (LSE) opened 1.5% lower. Initial negative sentiment seems to have subsided since then, as Shell’s shares are now up 0.70% as of 11:08 AM British Summer Time (BST).

Shell’s American depository receipts (ADR), which trade on the New York Stock Exchange (NYSE), are currently trading 2.91% higher in pre-market hours, as they stand at $63.93 as of 7:10 AM EDT.

In related news, infamous short seller Jim Chanos has blasted the merger deal between Shell and BG Group as he believes it was not a sensible decision on Shell’s part. He criticized BG’s inability to pay for its investment spending with organic capital, further stating that the company cannot cover its dividend payments with its cash flows. He has suggested for investors to short Shell’s shares.

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