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Shell to Acquire BG

Royal Dutch Shell is to buy BG Group in one of the largest energy company acquisitions seen in a decade. The deal is worth £47 billion ($77 billion), representing a 50% premium on BG’s share price as of 7 April 2015, and the combined entity will be the largest company in the FTSE 100.

Shell is a vertically-integrated company, whose operations range from exploration and production of oil and natural gas, refining, petrochemical production, and marketing of fuels and other products.

BG Group is more focused on upstream activities. In 1986, privatisation of the UK’s natural gas industry created British Gas, which subsequently demerged its gas retail and transmission and distribution network operations, leading to BG Group in its current form by 2000. Its activities include hydrocarbon exploration, and sale of LNG. It has avoided the more conventional LNG business model (long-term fixed point-to-point contracts). Instead, it offers customers both pipeline and LNG gas, with a fleet of carriers able to transport LNG globally from a number of production sites to the delivery sites.

The rationale for Shell, aside from expected cost synergies of around $2.5 billion a year, includes access to BG’s valuable production assets in Brazil and Australia. Also, it will allow Shell to benefit from BG’s established LNG business. In 2014, Shell sold 24 million tonnes (equity basis) of LNG, while BG sold 10.9 million tonnes in 2013, thus the deal will bring a substantial increase in sales volume. BG expects global demand for gas to increase at an annual rate of around 2.4% up to 2025.

Some analysts are asking whether this acquisition marks the beginning of an M&A surge for the energy sector. Oil prices are currently hovering around $50 a barrel, largely because the US has boosted its domestic production from oil shales, leading to a fall in its imports and thus global oversupply. As this is likely to persist, energy companies will be looking for ways to enhance profitability as their top lines are pressured by the low price of crude.

 

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