By GEOFF HO: Dec 27, 2015
With the price of oil languishing below $40 per barrel Ben van Beurden needs a miracle
With the price of oil languishing below $40 per barrel he requires prices to start rising in order to save his £47billion takeover of BG Group. When Van Beurden announced the deal in April, a number of Shell’s investors had doubts because of the valuations involved. Those doubts have since become full-blown fears, as the oil price has fallen through the floor.
To be fair to Shell, there is merit to the deal. BG will provide it with quality assets and enough free cash flow to reinforce its under-pressure dividend. It has also identified billions of cost savings. However, the takeover is predicated on the oil price being at $60 to $70 a barrel and the slump has completely changed the economics of the BG deal.
Oil prices will not stay this low forever, after all it is a finite resource. But with the US and other countries moving to increase production, rather than capitulate in the face of OPEC’s efforts to price them out of the market, I doubt that it will recover enough in 2016 to make the BG deal economically viable.
The Shell chief has staked his personal authority on the deal going through, but I think abandoning it and taking the flak might be the smarter move. Van Beurden should remember it is a lot harder to recover from a bad deal than it is from doing no deal. Merry Christmas and have a happy new year.
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