Yemisi Izuora/Agency Report
Oil giant Shell inches into becoming world super major company leading in deep water exploration company in a new BG deal.
These portfolios would be added to Shell assets with the acquisition of BG Group.
BG will bring some attractive long term assets into Shell, cementing its position as one of the handful of Super Major oil companies.
The deal is reportedly the most significant in Shell’s history since Royal Dutch and The Shell Transport and Trading Company agreed to pool their resources in 1907.
Shell also targets $3.5bn a year of cost benefits from the deal, by 2018, and up to $30bn of proceeds from asset sales.
The enlarged Shell group will have a vast portfolio, with key strengths in deep water fields offshore Brazil, SE Asia, Nigeria and the Gulf of Mexico.
Shell will claim global leadership in LNG once BG’s assets are added, with projects in Australia, Nigeria, and Qatar.
Shell has big oil sand reserves in Canada and is a huge player downstream, with key assets including the giant Pearl gas-to-liquids facility in Qatar and America’s largest refinery complex at Port Arthur.
BG will establish Shell into a bigger position in both Liquefied Natural Gas (LNG) and deep water oil production. Shell also gets access to BG’s giant oil discoveries offshore Brazil and an innovative LNG project in Queensland, Australia, which together offer the prospect of substantial growth in production volumes.
But the current level of oil prices is so low that in the short term, adding BG to the portfolio could well just serve to increase the financial pressures on Shell, because the dividend bill is set to rise by more than the earnings BG may bring.
Disposals could buy time, but until oil and gas prices recover to levels that leave the dividend well supported by earnings, doubts as to whether Shell can really afford to continue being so generous to its shareholders will remain.
Shell, like other large oil companies had been struggling to replace reserves with new discoveries.
Adding BG will replenish Shell’s reserves and boost production for years to come. Combining the two companies creates cost cutting opportunities, and both companies’ portfolios will be pruned to focus on the most attractive assets.
Most big oil companies struggle to find enough new reserves to replace the oil and gas they produce each year.
Last year for instance, BP replaced just 61 percent of the reserves it produced, and Shell saw reserves shrink, because low oil prices left a proportion of its reserves uneconomic. BG Group, with production expected to rise steadily out to the end of the decade, will ease a lot of pressures on this front.
Shell expect to raise around $30bn from disposals over the next few years as the two portfolios are focused onto the key assets with highest potential.
This should support dividend payments in the near term. In the longer run though, shrinking the scale of the group will not help make the dividend any more affordable, unless very high prices are achieved.
Shell will issue around 1.5bn new shares as part payment for BG, as well as using $13bn of cash reserves.
The dividend on those new shares will cost Shell around $2.9bn a year, on last year’s pay-out of $1.88 per share. But last year, low energy prices saw BG’s net income fall to just $1.7bn last year, and with energy prices where they are, the figure for 2016 could be lower still.