Shell opens rich seam for the City

The flag flies outside Royal Dutch Shell's headquarters in The Hague. Picture: AP
The flag flies outside Royal Dutch Shell's headquarters in The Hague. Picture: AP
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M&A experts poised to strike gold as energy giant’s BG takeover bid heralds new wave of consolidations, writes Martin Flanagan

AS EASTER eggs went, investment bankers got a golden one from Royal Dutch Shell’s £47 billion blockbuster swoop on BG Group. The “deal suits” will find shaken oil and gas company boardrooms far more receptive towards what is likely to be their new calling card: strike yourselves or risk being swallowed. And the investment bankers’ pickings could be rich.

Bank of America Merrill Lynch and Goldman Sachs, lead advisers to Shell and BG Group respectively, could expect to have picked up 1 or 2 per cent of the deal’s value, say City experts. That would suggest hundreds of millions of pounds in juicy fees. And, following a merger that responds head-on to the changing fundamentals of an industry squeezed by a collapsed oil price, other investment banks will anticipate the new air of M&A opportunism.

Most energy sector executives and City analysts believe it is a case of when, not whether, the next big deal will happen.

Much of the smart Square Mile money believes there is a minimum of one other landscape-changing business combination in the offing, mixed with a wave of consolidation in the secondary ranks.

After its lengthy litigation in the US from the Gulf of Mexico environmental disaster in 2010, and the impact of western sanctions on its Russian business, BP is seen as likely to be prey as predator.

US giant ExxonMobil and Shell/BG have been established as the oil equivalent of Manchester City/Chelsea in the English football premiership, with far deeper pockets and reach than any other player. The BG acquisition, still open to being gate-crashed by another major even given the toppy 50-per-cent-plus premium being offered by Shell for the shares, gives the British/Dutch giant 25 per cent more proven oil and gas reserves and 20 per cent more output. Not to mention $2.5bn of cost-cutting synergies from the transaction.

Might Exxon decide that a swoop on BP would make it unquestionably the number one again? Meanwhile, in the mid-ranking UK oil and gas sector, Tullow Oil, Dragon Oil, Ophir Energy and Soco International are all, to some degree, seen as being “in play”.

Shares in Tullow and Ophir Energy, in particular, jumped on the day of the Shell/BG announcement. “The deal could provide a further fillip to the stock market whereby companies are prepared to deploy cash on investments in which they see considerable future prospects,” says Richard Hunter, head of equities at Hargreaves Lansdown stockbrokers. “The deal could prompt other energy companies who have been running the slide rule over potential targets to make their move.”

A 50 per cent fall in the oil price to between $50 and $60 since last summer has seen the majors respond with billions of dollars of asset sales and sharply retrenched capital spending programmes. But that can only achieve so much in the new pricing climate partly caused by the US shale gas boom, reduced Chinese demand and the refusal of Saudi Arabia to adopt its usual Opec role of “swing producer” to balance out supply and demand.

In some ways it is back to the future, mirroring the consolidation shake-out in the late 1990s when a low oil price saw Exxon merge with Mobil, BP under Lord Browne snap up Amoco and ARCO, and Chevron merge with Texaco.

Some believe the big three behind Exxon and Shell – ie Chevron, French group Total and BP – will be the most worried about the latest scene-changing acquisitive developments.

“For Shell, an acquisition to replace reserves makes sense as attempts to join the US shale boom did not deliver much and exploration budgets are being cut,” says Dr Christian Stadler, of Warwick Business School. “If Shell takes over BG it could be the beginning of a new wave of mega-mergers in the sector.”

The downside of major mergers is that history shows they often destroy shareholder value. That will still give chastened energy boardrooms pause for thought when the investment bankers come knocking with their Powerpoint presentations and hyperactive smartphones.

That is when integration risk takes over from corporate ego. Shell/BG, for instance, will comprise 10 per cent of the value of the whole FTSE 100 index of blue-chip UK stocks. That is a lot to get right, even if it is not a worry for recently installed BG chief executive Helge Lund, who is set to leave with a £25 million golden hello/goodbye (it is a bit confusing) payoff for two months’ work. He struck oil in one sense at least.

Meanwhile, as events unfold, consolidation of the ageing North Sea sector, many of whose projects can’t really turn a buck at the current oil price, is taken as a given. There may be further headwinds for the energy hub of Aberdeen and surrounding region to weather.

Some believed state-owned oil and gas monoliths such as Petrobras in Brazil (with which Shell has deep links) and PDVSA in Venezuela may get caught up in any takeover feeding frenzy. However, this is probably less likely. State-owned oil giants in emerging markets are heavily tied up with national machismo. More likely is that such politically dominated energy majors will avoid merger risk-taking and, like Russia’s Rosneft with China and India, will seek growth and security in straitened times with one-off contract deals.

There were already strategic straws in the wind for the looming takeover derby. A few months back, oil services major Halliburton splashed $35bn on rival Baker Hughes, while Spain’s Repsol paid more than $8bn for Talisman Energy of Canada.

Meanwhile, analysts do not expect anti-trust issues to derail the momentum for Big Oil marriages. “Particularly at the top end of the market, there is less consumer and political concern about the size of the major players,” notes one oil analyst.

“Scale is seen as giving expertise and operational efficiency rather than some sort of commercial stranglehold on a country’s energy needs and the broader energy market.

“And investment banker advisors will be adept at quickly identifying any competition ‘remedies’ consolidators might need to sacrifice, in terms of divesting assets, to get a major deal through. The momentum for mergers we are seeing here is unlikely to be derailed by non-financial factors. There are too many things pushing for it.”