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Shell’s finance chief tries to persuade investors into £36bn BG merger deal despite oil prices plunge

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Royal Dutch Shell’s finance boss Simon Henry has just returned from the ski slopes. The first week back after New Year is usually slow as people readjust to the office.

But for Henry and chief executive Ben van Beurden there is no time to waste. The pair are straight into endless rounds of shareholder meetings.

They are trying to convince investors to agree to Anglo-Dutch giant Shell swallowing BG Group in a £36billion deal.

The deadline is the two big shareholder meetings set for January 27 and 28 when investors vote, and it needs 50 per cent of its shareholders to approve the mega-deal. 

Shell is the Footsie’s best dividend payer. But to remain so, while buying BG and as the oil price stays stubbornly close to 11-year lows, is a tough task and is costing it dearly. 

The cuts are brutal. But Henry insists the deal is about the long term and it is the 15-year perspective that investors should focus on.

But this picture is hard to visualise after the price of a barrel of Brent crude has collapsed since summer 2014 from around $115 to around $37 today.

The BG deal’s break-even price is just over $60 a barrel. The oil price needs to rise in the medium term to make the deal work.

Oil price and the dividend

Henry admits the oil price, as Goldman Sachs predicts, could fall as low as $20 within weeks.

But he says: ‘Not even Goldman Sachs is projecting anything below $60 for the 15 years that we are talking about.’

Shell has promised $1.88 a share dividend payout in 2015 and 2016, however, it cannot guarantee what it will be in 2017 and beyond.

Henry says: ‘The dividend will grow in line with income and cash flow. We have achieved this for some decades.’

But there is no guarantee and this is what worries investors.

Spending freeze

Shell is focused on penny pinching. It spent £7.5billion less last year than expected. But it has got to swing the axe further.

It reduced its already-squeezed spending plan by another £1.35billion for this year to £22billion and operating costs have been cut by 10 per cent compared to the previous year.

Asset sales

Shell has promised to flog more than £20billion of assets by 2018 from the combined group if the deal goes ahead and it is no coincidence that the net-debt related to the takeover is the same figure.

Shell has already sold off billions of pounds of assets – including petrol forecourts and refining operations – and has called its new plan ‘grow to simplify’.

But Henry says this isn’t a fire sale of oil assets at depressed prices. In March Shell announced the disposal of its 30 per cent stake in Nigerian assets for more than a £1bn and plans more sales in the country.

North Sea

Sweeping cuts have hit the North Sea hard. A reduction of contract workers and staff has led to more than 5,500 people – 15 per cent of the total – losing their jobs in the region according to trade body Oil & Gas UK. Some expect this figure to double.

Shell has already announced 500 jobs in its North Sea business will go and the area is braced for further cuts once the BG takeover is complete. 

However, Henry explains that the boom in the North Sea in the 1970s has meant many workers are now coming up to retirement age and when they leave they will not be replaced. Shell also still has major commitments in the area and is going ahead with its West of Shetland joint venture with BP.

Jobs and head office

Shell said it will axe another 2,800 jobs from the combined Shell and BG workforce when the deal completes after already announcing 7,500 job cuts last year. 

BG’s UK workforce in Aberdeen and Reading are most at risk. Decisions on office closures and redundancies will come after a ‘comprehensive review’. But Henry explains more than half of Shell’s finance and IT function has been moved to India, the Philippines and Poland.

Banker fees

Some may baulk at the £106million in advisor fees for the deal including more than £76million for banker and broker fees but this is actually a lot less than experts initially estimated. Henry also points out that Shell has its own 100-strong ‘investment bank’ team in house that have done a lot of the work.

And although the big investment banks are involved, he says: ‘It is a deal done chief executive to chief executive – direct.’

Shell is forecast to be the highest dividend-paying stock in 2016, accounting for 11 per cent of the payout, according to stock broker AJ Bell. 

If the deal does get approval at the end of the month investors will be hoping the dramatic cost cutting plan will enable Shell to retain the title of the best paying stock in 2017 and beyond. 


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