Royal Dutch Shell Plc and BG Group Plc: To Be Or Not To Be?

Some important points to consider before shareholders vote on Royal Dutch Shell Plc’s (LON: RDSB) takeover of BG Group Plc (LON: BG).

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.

All that remains for Shell’s (LSE: RDSB) takeover of BG Group (LSE: BG) to become a done deal is for shareholders to vote it through at the end of this month (AGM).

I’m now having second thoughts about this, partly as a result of last week’s news, which saw Standard Life announce that it will vote against the merger at the upcoming meeting.

This announcement has prompted me to stop for a moment and ask if the transaction still makes sense.  

The problem?

There’s a strong argument to suggest that, for those companies that invest right the way throughout an economic cycle, average profits will be higher over the longer term when compared with those of companies that are more reluctant to invest.

This may be a sound argument, but in my view it shouldn’t be used as an excuse to indulge masochistic tendencies.

The offer price for BG shareholders already included a notable premium. However, with oil prices falling like they have since April ($67) and the offer price having remained fixed, this premium has been rising steadily for some time.

With little sign of a rebound from crude on the horizon, the transaction is beginning to look like an ‘impairment charge waiting to happen’.

More to the point, for it to benefit shareholders in the way that management says it will, Shell will need every dollar of its oil price assumptions to prove correct. The break-even assumptions included in the offer were: $67/bbl in 2016, $75/bbl in 2017 and $90/bbl in 2018-20.

The cash flow break-even is $50 per barrel.

More oil price woes

These forecasts may have remained an open question if it weren’t for the fact that western powers have now begun to lift sanctions against Iran’s oil industry, so a further increase in global supply could be imminent.

In the pre-sanctions world, Iran’s output was close to 3.5m barrels per day, equivalent to just over 3% of current global production.

Regardless of how long it takes to get back to that level, any notable increase in global supply will only delay the time at which prices either stabilise or begin to recover.

The net effect is that Shell’s price assumptions are probably out of the window now, if they weren’t already.

The takeaway

Stranger things have happened but the prospects of the deal being voted down by enough shareholders appear to be slim.

Standard Life seems to be alone in opposition to the transaction, while an army of corporate advisers continue to egg on both sets of management and shareholders.

However, private investors should consider this.

Dividend cuts have rippled throughout the commodities space like a wave of falling dominoes of late. This is while Shell paid out more in debt interest during the first nine months of the current year than it actually earned itself during the period.

When the game is finally up on Shell’s oil price fantasies, its profitability is squeezed further and management is forced to kneel before investors with a record impairment charge in hand, how much longer do you think the dividends will last?

How long do you think it will be before management is forced to tear up the pledge of a $25bn capital return ahead of 2018?

It may never happen, but I believe events of the last quarter have made it a threat that warrants consideration.

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.

James Skinner has no position in any shares mentioned. The Motley Fool UK has recommended 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

Investing Articles

This 9.75% yielding FTSE 100 share is a total no-brainer for second income

This FTSE 100 insurance company is an absolutely brilliant source of second income and Harvey Jones reckons it will be…

Read more »

Dividend Shares

I could make £14.2k of passive income from £99 a week with this secret sauce

Jon Smith explains why sacrificing the immediate reward of dividends today can boost his long-term passive income prospects.

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Which looks the better bank buy right now: Lloyds or NatWest shares?

Lloyds shares are a very popular pick among FTSE 100 investors, but I think there are several better choices overall,…

Read more »

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

£9,000 in savings? Here’s how I’d target a £14,616 annual passive income with M&G shares!

Big passive income can be generated over time with 9.5%-yielding M&G shares, especially if the dividends paid are used to…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

If I’d put £1k in this FTSE 100 stock five years ago, here’s how much I’d have now!

Mark David Hartley works out what sort of profit he’d have made by investing in this FTSE 100 pick pre-pandemic.…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

After crashing 50%, is now the perfect time to buy this world-class FTSE 250 share?

The worst-performing share on the FTSE 250 over the last year is also the most exciting one of all. How…

Read more »

Illustration of flames over a black background
Investing Articles

Just released: July’s higher-risk, high-reward stock recommendation [PREMIUM PICKS]

Fire ideas will tend to be more adventurous and are designed for investors who can stomach a bit more volatility.

Read more »

Investing Articles

Is this one of the FTSE 100’s best-value growth shares?

Looking for great-value recovery shares to buy today? Based on City forecasts, this could be one of the best that…

Read more »