Royal Dutch Shell is in advanced talks to acquire BG Group for around £46bn ($ 68bn), in a deal that would expand the Anglo-Dutch group’s foothold in some of the world’s most exciting oil provinces and cement its dominance of the global trade in natural gas.
Since the price of crude began its rapid decline last June, expectations have been high that the oil sector could see a repetition of the mergers and acquisitions fever that reconfigured the industry in the late 1990s — another period of low oil prices.
That created the current crop of big oil companies such as BP, Chevron and ExxonMobil. Shell’s bid is worth about £46bn, according to people familiar with the matter, which represents a 50 per cent premium to BG’s market value. BG shares closed up 6.3 per cent at 910.4p on Tuesday, valuing the company at £30.7bn, before news of the talks broke.
Some significant deals have already materialised: Halliburton, the oil services group, recently bought rival Baker Hughes for $ 35bn and Repsol of Spain late last year acquired Talisman Energy of Canada for $ 8.3bn. Rex Tillerson, chief executive of ExxonMobil, said last month that the company could be open to a large deal.
Acquiring BG would give Shell access to significant reserves of oil and gas and spare it the cost of trying to boost its reserve base through exploration, which is becoming increasingly expensive. For example, Shell has spent about $ 6bn on its hunt for oil off the north coast of Alaska, and has not yet managed to finish a single well.
A takeover would also give Shell a significant foothold in an area offshore Brazil known as the pre-salt, which is one of the world’s most highly-prized oil provinces, as well as a big position in unconventional gas in Australia.
BG is one of the world’s largest producers and traders of liquefied natural gas, a form of gas that is supercooled to a liquid state and exported round the world on special tankers. Shell, too, has a huge position in LNG and will dominate the global trade in the fuel if it acquires BG. BG has recently completed work on a $ 20bn LNG facility in Australia, which began production at the start of the year after years of delays and cost overruns.
BG confirmed in a statement late on Tuesday that it was in advanced discussions with Shell, though it said there could be no certainty that the Anglo-Dutch major would make an offer.
It said that in accordance with the UK Takeover Code, Shell had to announce its firm intention to make an offer for BG by May 5 or say it did not intend to — though the deadline can be extended.
BG has been hit particularly hard by the 50 per cent slide in crude, which helped push it into a full-year loss for 2014. The company’s share price has fallen by around 28 per cent since last June, when oil began its decline, and in February it announced it was writing down the value of its asset portfolio by $ 8.9bn to reflect the price fall.
The company has also been wracked by management instability in recent years. Its long-serving chief executive Sir Frank Chapman was replaced in 2013 by Chris Finlayson who lasted only 16 months in the job. He was temporarily replaced by Andrew Gould, BG’s chairman. The company’s current chief executive Helge Lund, former boss of Norwegian state oil major Statoil, took the helm in February.
A person familiar with the matter said that Shell’s bid was unsolicited, and BG had not been put up for sale. Mr Lund had been installed as chief with a remit to turn round the company, which has been hit by a series of profit warnings and significant problems at its Egyptian operation in the wake of the Arab spring.
Under Mr Gould, the industry veteran who was previously chief executive of Schlumberger, the oil services group, BG continued its push to accelerate asset sales aimed at slimming its debt levels and protecting its credit rating.
Ahead of confirmation last year of Mr Lund’s appointment, Mr Gould outlined his commitment to radical dealmaking.
“Nothing is sacrosanct, there are no sacred cows,” he said. “In reviewing our optionality both for disposals, as for future developments, everything is on the table.”
In February, presenting BG’s results ahead of Mr Lund’s formal arrival, Mr Gould warned the recent fall in oil and gas prices appeared to threaten the worst shock to the sector since the collapse of 1986, when big additions to world supply led to a protracted decline in the cost of crude.
He said BG would respond by cutting capital expenditure by 30 per cent compared with last year as the company dropped its prediction that it would achieve free cash flow by late 2015 following years of heavy investment in Australia and Brazil.
Reporting by Guy Chazan, Arash Massoudi, James Fontanella-Khan and Michael Kavanagh
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