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Shell’s £43bn gamble of a deal for BG is sliding out of reach

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Screen Shot 2015-10-31 at 16.01.23The big question facing Mr van Beurden, is whether he can pull off such an ambitious move. If not, his time at the helm will be shortlived.

By Ben Marlow: 31 Oct 2015

Ben van Beurden must be sick of answering the same question but unless there is an unlikely sudden surge in the oil price – and therefore the fortunes of the world’s energy giants –the boss of Shell is likely to be quizzed on the same issue many more times in the coming months.

What people want to know is, will the UK oil major press ahead with its mammoth £43bn takeover bid for BG Group despite the dramatic slump in the oil price?

• BG Group profits drop as it nears merger with Shell

The fall from highs of more than $100 a barrel in mid-2014 to as low as $43 has unleashed havoc across the energy industry, forcing the majors to rein in costs at lightning speed as they desperately try to prop up profits and keep paying dividends to investors.

Shell announced its bumper bid for BG Group back in April. Mr van Beurden was triumphant. The deal would be the largest the industry had seen for decades and would propel the combined company past HSBC to become Britain’s biggest public company and, with a stock market value of £180bn, put it second in the oil world only to ExxonMobil.

Yet, to land his prize, the Dutchman, a Shell lifer who had landed the top job the previous year, had agreed to pay an eye-watering £43bn in shares and cash, and a 50pc premium to BG’s share price.

Almost immediately observers began asking how he could justify such an astronomical outlay on one of its big rivals in the face of such a massive deterioration in the fortunes of the energy world.

Yet despite the obvious risks that surround such a mammoth deal, Mr van Beurden has made a convincing argument for pushing ahead. Rather than being the time for restraint, the current environment is the moment for bold action, he has insisted.

Mr van Beurden claims the deal will help reshape Shell for the modern era by enabling it to focus on fewer and more profitable areas, such as deepwater exploration, where massive reserves are still being uncovered. It would also act as a giant springboard to expand heavily in natural gas, seen by many in the industry as the carbon fuel of the future.

Mr van Beurden’s ambitious move has echoes of the late 1990s when BP boss John Browne stunned the oil world with a blockbuster bid for US rival Amoco.

Their merger, which created Britain’s largest company at the time and placed it in the top three international oil producers, came against a backdrop of depressed world oil prices, which had plummeted to their lowest levels in decades.

The price of a barrel of Brent crude had sunk as low as $11 a barrel, leaving gaping holes in company profits and forcing many to jump into the arms of arch rivals in a bid to survive the brutal downturn.

However, as time passes and the oil price continues to languish at such low levels, the logic of Shell’s BG takeover looks increasingly shaky.

Last week, Shell reported a $6.1bn third-quarter loss, and announced it was abandoning another slew of projects in Canada and the Arctic region, having already responded with tens of billions of dollars in spending cuts and redundancies.

Just days earlier, BP laid out plans for even deeper cuts, after its third-quarter earnings nearly halved compared with the same period the previous year.

Mr van Beurden’s big problem, from which it is almost impossible to escape, is that the deal is predicated on something over which he is completely unable to influence: the oil price bouncing back sharply.

To complicate his position further, when the deal was announced, Shell laid out its predictions on which it based the BG bid. These were $67 a barrel in 2016, $75 in 2017 and $90 a barrel by 2018.

In July, the Shell boss went even further, stating that BG’s wide-ranging assets, including natural gas plants in Australia and oil fields off the coast of Brazil, would add to Shell’s cash flow if crude hit $67 a barrel in 2016.

From the outset, the numbers looked a big bet but the oil price has since fallen a further 11pc and many experts believe it will be depressed for the foreseeable future, including even BP and Shell’s own economists.

Last week, BP revealed it would now operate on the basis that the oil price would be $60 until 2017, while Shell also slashed its long-term outlook on oil and gas prices.

Adding to Shell’s challenges, its own share price has fallen 15pc since the deal was announced while BG’s has only slipped 10pc, making the deal less compelling for BG shareholders.

In other words, the rationale for one of the biggest takeovers ever attempted by a UK company appears to be shrinking fast.

And if the oil price doesn’t scupper it, there are still numerous regulators to convince in Europe, Brazil, China and Australia, an outcome that is far from certain. Finally, shareholders of both companies need to approve the deal.

The big question facing Mr van Beurden, is whether he can pull off such an ambitious move. If not, his time at the helm will be shortlived.

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