Will Royal Dutch Shell Plc Walk Away From BG Group plc As Profit Slumps?

Will the BG Group plc (LON: BG)/Royal Dutch Shell Plc (LON: RDSB) deal fall apart after BG’s profits slump?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

BG (LSE: BG) and Royal Dutch Shell’s (LSE: RDSB) mega-merger is the largest deal the oil & gas sector has seen for some time. However, the combination isn’t a done deal just yet. 

There are still many kinks to iron out, and the deal has to get the green light from regulators. What’s more, Shell could decide to walk away if the numbers don’t stack up

Poor results 

BG has been struggling for some time, and the group’s recent set of results highlighted the company’s troubles. Specifically, BG’s first-quarter net profit fell 51% to £366m and revenue slumped by 21% to £2.6bn as weak oil prices weighed on group profits.

Additionally, oil & gas production only increased by 1% year on year as production growth within Brazil and Australia was offset by falling production elsewhere.

Still, Shell is overly concerned about BG’s short-term results. The company really wants to get its hands on BG’s valuable oil & gas reserves. Acquiring these reserves will transform Shell into the world’s second-largest oil & gas producer, and the largest liquefied natural gas producer.

But Shell has a number of issues to overcome before the deal completes and these could put the company off BG.

Employee troubles 

It has emerged within the past week or so that when BG and Shell finally combine, BG’s existing employees will have to compete with each other to keep their jobs. 

Shell is looking to slash costs at the enlarged group by around $2.5bn per annum by 2018. 1,200 of BG’s 5,000 employees are located within the UK, and it’s likely that the axe will fall here first, before moving to the international employee base.

However, there are already some concerns that BG’s most talented employees may choose to leave, rather than jump through hoops to compete for jobs at Shell. One of BG’s managers has gone so far as to say that some of the company’s employees are genuinely upset that BG is losing its autonomy and the deal is going ahead. 

Not much experience 

Shell has almost no experience doing mergers of this size. The company did not participate in the energy mega-mergers of the 1990s that created the international energy behemoths ExxonMobil and Chevron.  

Therefore, some analysts are wondering out loud if Shell can pull off the integration without any major hiccups. 

Indeed, Shell and BG are very different businesses, despite operating in the same industry.

BG is known for swift decision-making and go-go mentality. On the other hand, Shell is a company that prefers the slow-and-steady approach. It has become known as a hierarchical and bureaucratic organisation.

And BG’s go-go style has helped the group leap to the top of the oil sector over the past two decades. In the 15 years to 2012, BG made 16 vast oil discoveries, a record unmatched by other majors.

However, BG’s management style has hampered the development of these projects. Shell, on the other hand, has the skills required to develop these discoveries over the long-term, on time and on budget. 

Falling apart 

All in all, Shell and BG are two very different companies, and their £55bn merger could still fall apart. 

It’s all down to BG and Shell’s management teams and the way they decide to go about integrating the two businesses. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns shares of Chevron and Royal Dutch Shell B. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

How I’d invest my first £20k ISA to target £4,900 a year from dividend shares

Looking for dividend shares in a new Stocks and Shares ISA, and want diversification too? Here's how I'd go about…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »