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Shell shares won’t run better just because BG’s been added to the tank

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Screen Shot 2016-01-31 at 08.30.26Shell shares won’t run better just because BG’s been added to the tank

By Ian McVeigh: 31 Jan 2016

Screen Shot 2016-01-31 at 08.31.55Shell’s bid for BG received an 83pc vote in favour from its shareholders.

For some time it has been apparent that Shell was irrevocably set on this course in spite of the collapse of the oil price. The image of a supertanker unable to stop inevitably springs to mind. I am sure BG shareholders can’t believe their luck. Their shares would be around half the current level without Shell’s bid.

For the fund management industry the vote in favour is hardly likely to go down as one of its finest moments, though a 17pc “no” vote is relatively large in such circumstances.

As the oil price has fallen, the rationale for the deal has changed and attempts to justify it on financial grounds have been largely abandoned. The deal has increasingly been presented as highly “strategic”.

ISS, voting advisers to the nation’s local authority pension schemes, talks of a “compelling strategic case”.

Strategic is a word with particular resonance in the City, meaning a deal that stacks up on potentially no plausible financial metric. Terry Smith, as CEO of Tullet Prebon, banned its use in board meetings.

If the investors who voted in favour of the deal believe that they can identify very long-term strategic trends in energy, in my opinion they are fooling no one but themselves. James Anderson, of Baillie Gifford, recently suggested that we may well view 2015, with the collapse in the oil price, as “the year that marked the end of the age of fossil fuel”. He looks to new technologies, solar, batteries and electric cars, to transform energy usage in the next 20 years.

A brief history of changes in energy underlines how radically the landscape can change and how unlikely it is that anyone can really see the long term.

In 1892 The Times claimed that emissions from the main means of transport would make life unsustainable. The paper thundered that by 1940, London’s 300,000 horses, producing 30lb of manure per horse per day, would have buried the pavements to a depth of eight feet. The problem disappeared along with the horses as the 20th century ushered in the era of the motor car. Other things were raining down on the capital by 1940.

According to analysis by Gavekal, the world was thought to have oil reserves of a trillion barrels in 1980. In the 30 years to 2010, cumulative global consumption was around that one trillion barrel figure and by the end of the period the world had… two trillion barrels of reserves, as technology transformed the capacity to find and exploit new fields.

A recent article in the Economist said that the world is now drowning in oil. Who now owns up to the notion of peak oil? This fashionable view, supported by the environmental lobby, claimed that depleting reserves would see a permanently high price, justifying the financials of renewables and so saddling the world with unnecessarily high energy costs.

There can be no better example of the dangers of forecasting even quite short-run moves in energy prices than Ed Miliband’s proposed price freeze in the 2015 election campaign. How would a frozen price now look to customers?

Nuclear energy has shifted between being the “dark lord” of Three Mile Island and Chernobyl to the darling of the environmental movement with its low carbon emissions, and back to pariah status again after the tsunami in Japan.

Rob West, an oil analyst at Redburn Partners, tells me that in the 1960s both Russia and the US attempted fracking using underground nuclear detonation. Shale oil could have been nuke oil.

Changes in the energy sector are driven by technology change and move with something of the speed and unpredictability of the tech sector. Who would claim to be able to predict technology 30 years out? Yet, the vote in favour of Shell’s acquisition of BG would suggest there are many out there who believe they are in just such a position to do so.

While what is done is done, we can at least send out a cheer in the direction of David Cumming and Guy Jubb of Standard Life and a few others who publicly rejected the bid and showed that their engagement on behalf of investors is more than just empty words.

The role of the non-executive members of the board and the failure to attempt to renegotiate the price is disappointing. It tells us how little protection investors have when the executive management is set on a particular course.

For investors, none of this means that Shell’s shares, having already fallen by 40pc from their peak, may not be a reasonable investment, but it is not one in my view enhanced by this transaction.

For those most closely involved, any failure will be heavily cushioned. Advisory fees of around £200m won’t be reimbursed.

Multi-million-pound pension pots for senior management will enable the shareholder to show his appreciation in the customary manner.

The lesson learnt here is that shareholders and companies need to engage much earlier and more effectively on major strategy questions than has been the case in this deal, and the fund management industry needs to find a better forum in which this can happen.

Ian McVeigh is head of governance at Jupiter Asset Management


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