Shell’s £43bn gamble of a deal for BG is sliding out of reach

1 Nov 2015 | Author: | No comments yet »

Cheap oil claims new casualty as BG Group profits slide.

Ben van Beurden must be sick of answering the same question but unless there is an unlikely sudden surge in the oil price – and therefore the fortunes of the world’s energy giants –the boss of Shell is likely to be quizzed on the same issue many more times in the coming months. BG Group’s profits slumped by 37 per cent during the third quarter as the former exploration arm of British Gas became the latest casualty of tumbling oil prices.Royal Dutch Shell revealed the scrapping of costly exploration in Alaska and Canada, alongside sharply lower oil and gas prices, had sparked a $7.4-billion third-quarter net loss. And on Friday, US oil giant Chevron announced plans to slice capital expenditure next year by 25 percent to $28 billion at most, after posting slumping third-quarter earnings. “This week, the highlight has been the recent investment cutbacks from major energy companies, which contributed to easing supply glut concerns,” Sucden analyst Myrto Sokou said.

BG said on Friday that earnings before interest, tax, depreciation and amortization fell 65% in its liquefied natural gas shipping and marketing business. The fall from highs of more than $100 a barrel in mid-2014 to as low as $43 has unleashed havoc across the energy industry, forcing the majors to rein in costs at lightning speed as they desperately try to prop up profits and keep paying dividends to investors. The profit fall capped a tough week for the oil industry with BP announcing a 40 per cent decline in third-quarter profits and Shell a record $7.4bn loss in the same period.

Europe’s biggest oil company said it will press ahead with its largest-ever acquisition even as the worsening outlook for energy prices contributed to asset writedowns of almost $8 billion. A raft of energy companies — also including US pair ConocoPhillips and Hess Corp., and Total of France— have all either delayed, trimmed or axed projects in response to sliding profits and sharply lower energy prices. This pushed profits at the group’s “upstream” exploration and production business down 79 per cent to $1.36bn, despite a 2.3 per cent rise in production to 3.9 million barrels of oil equivalent a day. The purchase will add to Shell’s natural gas assets around the world, extend its access to oil resources in Brazil and help it replace reserves that dropped in three of the last four years. IEA executive director Fatih Birol said ample oil supplies likely would extend into the middle of next year — but investment is expected to drop further because of persistently low prices.

Despite the company revising higher its earnings expectations for the segment in 2015, revenue slumped 65 percent year-on-year, against a 9 percent top-line fall for the overall group. The price rebound was punctured somewhat after the Federal Reserve signalled Wednesday it could raise rates before the end of the year, expressing optimism for the world’s top economy and oil consumer, after “solid” consumer spending and business investment. Yet, to land his prize, the Dutchman, a Shell lifer who had landed the top job the previous year, had agreed to pay an eye-watering £43bn in shares and cash, and a 50pc premium to BG’s share price. Long term, the combination will create the world’s largest LNG shipper with around 14 percent of the global market for the fuel, which is natural gas chilled to a liquid and then transported to customers by giant tanker.

Van Beurden, a 35-year veteran at Shell, took over as CEO in January last year, having led the company’s refining, marketing and chemicals unit previously. But the sector is under the gun to an even greater degree than crude oil prices, which have fallen by 43 percent since last October, and off which BG links most of its LNG contracts.

Mr van Beurden claims the deal will help reshape Shell for the modern era by enabling it to focus on fewer and more profitable areas, such as deepwater exploration, where massive reserves are still being uncovered. BG Group estimates that global supply of the fuel will grow by 50 percent to around 375 million tonnes annually by 2020 as a series of LNG developments that have been decades in the planning come online.

Mr van Beurden’s ambitious move has echoes of the late 1990s when BP boss John Browne stunned the oil world with a blockbuster bid for US rival Amoco. Last week, Shell reported a $6.1bn third-quarter loss, and announced it was abandoning another slew of projects in Canada and the Arctic region, having already responded with tens of billions of dollars in spending cuts and redundancies. BP Plc, one of the first companies to predict a prolonged price downturn, said Oct. 27 that it has “reset” its business to be able to generate surplus cash flow with oil at about $60 a barrel by 2017.

Adding to Shell’s challenges, its own share price has fallen 15pc since the deal was announced while BG’s has only slipped 10pc, making the deal less compelling for BG shareholders. The other companies are only expecting to achieve that target in 2017, Clint said. “There’s been some clearing of the decks and cash flow numbers show Shell’s balance sheet is strong,” Smith & Williamson’s Lawlor said. “Still, the quarter emphasized the level of pain investors may have to face.

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