Shell to Buy BG Group -- 4th Update

By Selina Williams and Sarah Kent 

LONDON--Petroleum giant Royal Dutch Shell PLC has agreed to buy BG Group PLC for about $70 billion, in a deal that would create the world's largest independent producer of liquidated natural gas amid a historic downturn in energy prices.

The deal, which confirms an earlier report by The Wall Street Journal, brings together two companies that have been buffeted by a sharp drop in oil and gas prices since last summer and would enable the two European energy giants to eliminate overlapping costs to help offset the impact of weaker prices.

It would be the first major energy acquisition since oil prices began a long slide last July that slashed the cost of a barrel of Brent crude, the global benchmark, from $114 to less than $60. It would be among the largest oil-and-gas deals of the past 20 years, according to Dealogic.

The deal, if approved by shareholders and regulators, would make Shell the world's largest producer of liquefied natural gas, Shell CEO Ben van Beurden said on a conference call. The purchase of BG's assets also would put it at the forefront of the competition among big, international oil companies to land the pole position in the race to dominate the global liquefied gas market, including BG's first rights on U.S. LNG exports in early 2016. Liquefied natural gas, or LNG, is shipped on specialized vessels around the world.

By applying its capabilities to the BG assets, Shell believes that, by around 2020, the combined group will have two strategic growth businesses--deep water and integrated gas--that could potentially each generate $15 billion to $20 billion of cash flow from operations a year, the statement said. BG has valuable oil and gas fields off the shore of Brazil and gas plays off of East Africa and on shore in Australia--assets that many analysts said were too big for BG to handle.

"LNG is a very important component of this," Shell CEO Mr. van Beurden said, adding that BG was at the top of the list of a number of companies Shell was considering buying. "The whole idea is that we turn the company on the back of this deal into a much more focused company, very, very strong in gas and very, very strong in deep water."

The deal was first broached in a phone call from Mr. van Beurden to BG Chairman Andrew Gould.

"It was very simple. I called Andrew up and we had a very good and constructive discussion about the idea and it very quickly seemed to make sense to both of us," Mr. van Beurden said.

Shell will pay a 50% premium to BG's closing share price Tuesday of 910.4 pence, with the offer consisting of 383 pence in cash and 0.4454 Shell B shares, giving BG shareholders a 19% stake in the combined company. The deal is expected to close in early 2016, Mr. van Beurden said, with no major competition issues foreseen.

Mr. van Beurden said the company would pay a dividend of $1.88 a share in 2015 and at least the same in 2016. A share buyback program of at least $25 billion is planned for 2017 to 2020.

However, while Shell and BG both trumpeted the benefits of the deal, some analysts were skeptical.

"Shell's track record of executing on acquisitions has not exactly been stellar over the past decade," said Michael Hulme, commodities fund manager at Carmignac Gestion. "To assume that Shell can pay a 50% premium for BG, and extract significant synergies, deliver value for shareholders, and maintain a dividend on an expanded shareholder base would require a more-than-healthy degree of optimism."

Shares in Shell fell 5% in early trading in London, while BG stock rose 37%. The deal provided a lift to stocks across Europe, with the oil-and-gas subindex of the Stoxx Europe 600 index surging 5.5% in early trade.

For Shell, the deal would shore up its weakening reserves--the company replaced only 26% of the oil and gas it extracted last year--while playing to its technological strengths in taking over BG's assets. It would also allow Shell to reduce its exploration spending at a time of low crude prices, Mr. van Beurden told analysts.

Shell Chief Financial Officer Simon Henry said the deal wasn't designed to be profitable at any particular oil price. Mr. van Beurden said the company would focus on paying down its debt, and the deal would "be the springboard for a more ambitious phase of portfolio restructuring and refocusing."

BG, which emerged from the break up of British Gas, has had a tough time in recent years, with its shares falling by about 30% from a peak last spring.

Investors have been disappointed after it failed to deliver on promises of production growth. BG said in February it was writing down the value of its oil-and-gas assets by nearly $9 billion as it adjusts to the plunge in oil prices by roughly half since last summer.

Mr. Lund, BG's CEO, took the helm of the British company in February, joining from Norway's Statoil, where he was renowned for his deal-making expertise.

BG's Mr. Gould said he remained confident in the company's long-term prospects, but felt the offer from Shell would allow BG to return shareholder value more quickly.

Mr. Gould said Mr. Lund would remain CEO of BG to ensure a smooth transition should the offer complete and would then probably "move along."

Justin Scheck contributed to this article.

Write to Selina Williams at [e-mail] and Sarah Kent at [e-mail]

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