Just a few months ago, as crude prices fell closer and closer to $20/bbl, Royal Dutch Shell’s (LSE: RDSB) £35bn acquisition of BG Group was all but chalked up as an expensive boondoggle. But the 46% rebound in crude prices since January lows has evidently changed some minds in the City as shares are up 32% over the same period.
The short-term implications of rising crude prices aside, Shell’s deal for BG was a prescient move by management to secure the company’s long-term viability. Dramatic action was necessary as a return to the good old days of $100/bbl crude seems increasingly unlikely due to the shale revolution in the US and long-term demand falling thanks to climate change-related regulations.
The BG acquisition, by creating the worlds largest supplier of liquefied natural gas (LNG) will help Shell navigate both of these challenges simultaneously. Although LNG prices have recently fallen alongside crude, the outlook for gas looks very good over the coming decades. Utilities across the globe are turning to the cleaner burning fuel to replace coal and even-out unreliable production from renewable sources.
And LNG export remains the provenance of the oil majors, the only companies with the capital and know-how to construct the mammoth facilities necessary to ship LNG across the world. The BG acquisition, by creating the largest global provider of LNG, and adding significant low-cost-of-production oil assets, will help set up Shell for years of continued success.
Value-crushing distraction?
J Sainsbury’s (LSE: SBRY) £1.3bn deal for Home Retail Group, the parent of Argos, is still not certain to go through. However, in case it is finalised, it’s worth exploring whether or not this deal makes sense for the grocer.
Sainsbury’s wants to use Argos’s click-and-collect business model to entice more customers into its out-of-town big box stores. This makes sense in theory, but ignores the fact that the Argos business is struggling mightily thanks to online competitors such as Amazon. Earnings at the retailer have shrunk by more than half over the past four years and are forecast to continue on this trajectory.
Sainsbury’s branching out from selling groceries to peddling home goods will do little to reverse the declining profitability of its core business. I firmly believe combining these two struggling retailers will do little more than distract management at a critical time and eventually erode shareholder value.
Necessary step
The £12.5bn acquisition of mobile provider EE by BT Group (LSE: BT.A) is just one of the ways the telecoms provider is attempting to get more customers to buy its profitable quad-play bundle of services. The high margins on these bundles are also why the company has recently spent over £2bn on sports rights and pricey TV shows.
Although competition in the industry for these customers is fierce, it’s a step BT needs to take as questions mount over the future of its main source of profits, Openreach. Openreach, the wholly-owned subsidiary that controls the majority of broadband lines in the UK, wasn’t split-off by regulator Ofcom in its latest industry review, but it’s being given more independence from BT. With 40% of BT’s profits on the line, the company is right to preemptively focus on quad-play offerings to make up a larger proportion of profits going forward.
