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

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

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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. 

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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.