This year’s biggest merger in the oil industry is happening between Royal Dutch Shell (LSE: RDSB) and BG Group (LSE: BG). For years there were rumours of the companies merging due to the complementary asset portfolio, and now that has become a reality.
Challenges
Currently, the challenge is to get the green light from various competition watchdogs around the world so the merger can take place. The merger has passed in the US, Europe and Brazil but so far there has been no decision from China or Australia. The deal has become stuck in Queensland with the Australian Competition and Consumer Commission (ACCC). The ACCC is concerned with Shell’s interest in Arrow Energy and that the company will prioritise gas supply to BG’s LNG facilities, thus reducing competition. Shell still believes that the deal will pass in Queensland: a decision will be made by the ACCC on the 19 of November.
Many still believe that if the authorities in China or Australia block the merger then there will be asset sales to appease the ruling. Glencore did exactly this before its merger with Xstrata by selling a copper mine to a Chinese company.
Preparation
Many analysts saw the deal as Shell betting on an oil price recovery, but I’m not so sure. The company has been divesting assets for years in a bid to streamline the company and this, in my opinion, was partly in preparation for a bid like this. BG has also been divesting assets that aren’t part of its core portfolio — this will contribute to the combined company being the most streamlined major in the industry. Shell has also changed its internal investment process, and now only the very best developments and projects are sanctioned and gain investment approval. This is to allow the company to make a profit even if the oil price stays below $60 for the foreseeable future.
Investment Case
I think that Shell is one of the best investment opportunities in London at the moment. The company has a dividend yield near to 7%, which is one of the highest in the market. The CEO Ben van Beurden has committed to keeping the dividend, and made it a top priority for the company. Dividend cuts are not the norm at Shell: the company hasn’t cut its dividend since World War Two. After the merger, Shell’s production will rise by 20% and reserves will rise 25%. There will also be an estimated $2.5bn in cost savings per year, and this will create a very impressive business. The combined company will have immense cashflows, a diverse portfolio of oil and gas assets, large reserves and a very healthy dividend yield.
Adding BG shares to your portfolio may make you a quick return as the shares trade below the offer price, but for me the value is long term and the combined company will be one of the best investments in the world.
