Offshore Energy Today yesterday reported on Shell’s move to take over rival company BG Group in what has been described as an oil & gas deal of the decade. Shell has agreed to acquire BG Group in a combined cash and shares transaction of an estimated value of $69.8 billion. Wood Mackenzie, one of the biggest energy intelligence groups in the world, has sent us their view of the deal.
1. It’s about deep water oil: a real prize for Shell is the oil in deep water Brazil. 60% of BG’s production in 2015 is gas but the proportion will decline over the next 10 years to 50% as the giant Brazil pre-salt fields come onstream. By 2025 Brazil will be delivering 550 kb/d of oil – 13% of BG/Shell’s total production, the biggest single country position in the combined portfolio.
2. An LNG behemoth emerges: The deal combines the two largest IOC LNG players to create an industry giant. By 2018, the combined entity will control sales of 44 mmtpa of LNG, making it the largest LNG seller in the world. Shell will have unrivalled flexibility and exposure to virtually every major LNG supply source and market globally, which means significant scope for portfolio optimisation. The move re-energises Shell’s LNG development pipeline, adding a leading US position, entry to East Africa, and new options to expand an already giant presence in Australia and Canada.
3. Unlocking the hidden value: the sum of the parts is often bigger than the whole in a merger of two, high quality diverse portfolios – especially buying at the low point of the cycle. Shell has said it will sell $30 billion of assets between 2016 and 2018. We see scope for significant value creation, once the asset market picks up, in trading out of country positions or assets that no longer fit.
4. Floodgates open? Most of the big players – IOCs and NOCs – are weighing up opportunistic acquisitions, but few have the means or appetite for deals anywhere near this scale. Most of the Majors are hamstrung by near-term financial stretch, and Asian NOCs are contending with growing political scrutiny of M&A strategy, past and future. If you’re looking to the next big deal, ExxonMobil stands out as most likely to pull the trigger. Companies that are unloved by the market but big in strategic resource themes – US tight oil, East Africa LNG, deepwater or frontier exploration – will be the focus of their attention. But don’t expect a wave of late 90s style consolidation.