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Royal Dutch Shell – BG Group Merger Almost Complete


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By Muhammad Ali Khawar on Feb 12, 2016 at 1:58 pm EST

The biggest energy deal of 2015, between Royal Dutch Shell Plc (ADR) (NYSE:RDS.A) and BG Group, is just three days away from its closing. On Monday, the two European energy giants will merge to form one of the biggest companies in the global oil and gas industry.

Today is the last trading day for BG Group on the London Stock Exchange. The company would be delisted from the Stock Exchange, effective February 15.

Though $70 billion may seem a lot to many people in the low oil environment, Bidness Etc believes the benefits of the merger are likely to outweigh its costs in the long-run.

BG Asset Portfolio

BG Group plc (ADR) (OTCMKTS:BRGYY) was formed in 1997, after British Gas demerged into two public listed companies. Since its formation, the energy corporation has gone a long way to improve its asset portfolio and win investors’ confidence. Over the past two decades, the company has fully transformed itself from a nationalized energy company to one of the biggest international oil and gas companies in Europe.

In the past 19 years, BG Group’s total resource base has increased from only 3.6 billion barrels of oil equivalent (boe) to more than 18 billion boe. Last year, when most energy companies slashed their production amid low oil prices, BG Group increased its total oil and gas production.

After successfully completing energy projects in Brazil and Australia, the Reading, UK-based company recorded total production of 704,000 boe/day. In 2001, its production was just 300,000 boe/d.

BG Group does not only have a strong presence in the oil market, but over the past few years the company has also strengthened its position in the liquefied natural gas (LNG) market. Believing natural gas had great growth potential, the European giant developed its global LNG portfolio with multiple production sources.

BG Group has LNG plants all around the world, including in Egypt, Australia, and Trinidad. Meanwhile, it also has a strong LNG customer base in the US and UK.

Shell Offer: Right Deal at the Right Time?

With top quality assets and impressive financial performance, BG Group has been a merger and acquisition target in the industry for a some time now. Low crude oil prices, having reduced the value of the energy company, have now provided an incentive to Anglo-Dutch oil giant, Shell, to buy it at a low price.

The deal, which will cost billions of dollars to Shell, would however improve its asset base and positively affect its earnings from 2018 onward. Moreover, the addition of BG Group to its portfolio would allow Shell to increase its global oil and gas reserves by 25%, while increasing its total production by 20%.

The current commodity market conditions have over-burdened the liquidity position of many energy companies, including Shell. The deal with BG Group would allow Shell to save around $3.5 billion annually, which would help the Hague-based oil company to save funds for future capital projects and shareholders’ dividend payments.

According to the Wall Street Journal, the energy consultancy firm, Wood Mackenzie, predicts the international LNG market to grow by 50% in the next five years. Shell also expects LNG demand to increase in future, as the industry shows a radical shift from fossil fuels to more environmental-friendly energy resources. The BG merger will not only give Shell more exposure to the Brazilian oil market, but also increase its interest in the LNG market.

Though the merger might not work in the short-run, as crude oil prices would continue to weigh down the financial performance of the energy company, Bidness Etc believes the deal would help Shell to better position itself against its peers in the long-run.

Editing by Shuaib Ahmed; Graphics by Hussain Akber


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