Shell to buy BG Group in $70bn energy deal

Royal Dutch Shell says it has agreed to buy oil and gas exploration firm, BG Group, in a deal that values the business at $70 billion, reports USA TODAY.

The two firms say they have reached agreement on a cash and shares offer which gives investors a 50 percent premium on BG Group’s share price on April 7.

The deal could be one of the biggest of 2015 and could produce a company with a value of more than $296 billion (£200 billion).

BG Group’s shares opened up 42 percent on the London Stock Exchange at 1,293.5p.

Royal Dutch Shell’s $70 billion purchase of Britain’s BG Group will make the energy giant the biggest global producer of liquefied natural gas, a fast-growing market expected to boom as developing countries and industrial energy users convert from coal and oil.

Shell, already a leader in liquefying natural gas (LNG) for shipping and transport, will meld BG’s gas reserves, including assets in Australia and Brazil, increasing its overall crude oil and natural gas reserves by 25%.

Under terms of the deal, BG shareholders will own about 19% of the combined company, which will have a market capitalisation of about $240 billion — or twice as big as British oil major BP. Still, it will be smaller than ExxonMobil, the world’s largest oil company, which has a market cap of $360 billion. But with BG’s gas reserves, Shell will boost its capacity to 33 million tons of gas annually, overtaking ExxonMobil to become the world’s biggest leader in LNG.

“LNG is a very important component of this,” Shell CEO Ben van Beurden said. “The whole idea is that we turn the company on the back of this deal into a much more focused company, very, very strong in gas and very, very strong in deep water.”

The mega-merger, one of the biggest in the energy sector in over a decade, comes amid a slump in oil and natural gas prices, and could ignite a flurry of industry mergers.

Royal Dutch Shell shares fell more than 2% on Britain’s FTSE 100 index, amid fears that Shell might have overpaid for BG.

Shell executives pitched the deal as one that will add to earnings and cut costs during a period of uncertainty in energy pricing.

“The combination of our two businesses is a powerful one, which has sound strategic logic,” said Andrew Gould, chairman of BG Group in a conference call. “BG’s deep water positions and strengths in exploration, liquefaction, and LNG shipping and marketing will combine well with Shell’s scale, development expertise and financial strength,” he said.

Shell said the deal would produce gains of around $2.5 billion a year.

The deal also represents an opportunity for both firms to cut overlapping costs. Shell said the merger will cut current spending on oil and energy exploration by nearly 50 percent.

Still, the deal won’t boost Shell’s earnings until at least 2017. Executives said the deal will be “ mildly accretive to earnings per share in 2017 and strongly accretive thereafter.”

“We firmly believe that this is the right strategic next step for Shell’s shareholders, and for the shareholders of BG,” Shell chairman Jorma Ollila saidl. “By combining BG’s portfolio and skills set with Shell’s capabilities, we can deliver a step change in the growth priorities for both of our companies, accelerating our strategy in plays such as in deep water and liquefied natural gas.”

Oil prices have tumbled about 50 percent since June on sluggish global demand and burgeoning supplies. Spot natural gas prices have been in a prolonged slump. At about $2.62 per million British Thermal Units (BTUs) in Wednesday trading on the New York Mercantile Exchange, natural gas is trading at a fraction of the $11 levels of 2008. With record production and a mild winter cutting demand, stockpiles remain near record levels.

Some analysts, including at Goldman Sachs, are forecasting that energy prices could remain low for a long time.