The Motley Fool

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

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.

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.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

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.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic…

And with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be daunting prospect during such unprecedented times.

Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…

You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.

That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.

Click here to claim your free copy of this special investing report now!

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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.