Shell & BG Rock Stocks - FTSE Hits 7,000

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Royal Dutch Shell (LSE:RDSA) (LSE:RDSB) pushed other world news off the front page this morning, announcing that it has agreed to buy BG Group (LSE:BG.) for $70 billion dollars (£47 billion) at a premium of 50% on BG’s closing price yesterday, which was 910.40. That would price BG shares at 1,365.60.

BG shares jumped to 1,301.62 when the market opened and are holding at 1,214.00, a 33.35% increase, as of 1:30 pm.  The impact on the FTSE pushed it above the 7,000 mark several times during morning trading, offering more evidence to die-hard skeptics that surpassing 7,000 is not a one-time miracle. The FTSE is currently at 6.985.00, indicating relatively little sign of an afternoon malaise.

RDSA shares are down 2.7% to 2,037.50, more than 120 points higher than its 52-week low. RDSB shares are off by 6.02% at 2,075.50. Although RDSB shares are within 91 points of their 52-week low, it does not, at this point, appear that either A or B shares will drop below 2,000, a mark that it has not closed below in more than two years.

Executive Comments

Shell CFO Simon Henry said that the deal was not associated directly with profitability at any particular price point for oil. Rather, according to CEO Ben van Beurden, “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.”

If we believe these gentlemen, and I do, this move has much more to do with a strategy to strengthen Shell’s position relative to its dwindling reserves, its position in natural gas, and its position as one of the global leaders in the energy sector. Depending on how one looks at the deal, you might say that paying for the latter two benefits provides free access to additional reserves that would have otherwise cost millions more in exploration. These reserves are guaranteed. Finding new ones is not.

What the Company Will Look Like

Everyone is talking about ExxonMobil (NYSE:XOM) today, speculating about the impact of this deal on their predominant position in the global marketplace. Adding fuel to that fire is the rumor that ExxonMobil had considered acquiring BG Group near the end of 2014.

Although the current combined $169.18 billion market cap of Shell and BG is still less than XOM’s $359.69 billion, revenues are a horse of a different color.

ExxonMobil revenues for 2014 were $369.43 billion. Shell generated $421.10 billion. BG Group came in with $19.2 billion. In terms of EBITDA (my personal favorite measurement of success) Shell and BG posted a combined $53.52 billion ($44.38 plus $9.14) against ExxonMobil’s $56.05 billion. If Shell makes the right moves and can improve its operating margins, this could become the deal of the century – and we are only 15 years in. Measured by enterprise value, it will be the third largest oil and gas merger in history.

Competitors will quickly recognize that the new company will own 18% of the entire global liquid natural gas production. That’s a big slice of market share for a product that is continually in increasing demand.

Not an Easy Road

It’s not necessarily going to be an easy road for Shell. The company will be adding debt to finance the acquisition, putting another load on the shoulders of its balance sheet and a short-term dilution of earnings. Sometimes we need to expect some inconvenience on the road to greater prosperity.

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