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Shell Steams Ahead With BG Takeover With Promise of More Savings

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Rakteem Katakey: November 3, 2015:

  • Raises estimates of savings after combination to $3.5 billion

  • Gas business becomes stand-alone unit under Maarten Wetselaar

Royal Dutch Shell Plc said its record takeover of BG Group Plc will still deliver value to investors even in a prolonged oil-industry downturn and reshaped its business in preparation for the acquisition.

Europe’s biggest oil company will save an addition $1 billion in operating costs from the combination with BG, bringing the total estimate of synergies from the deal to $3.5 billion, Shell said in a statement on Tuesday. The takeover will still add to the company’s earnings per share and cash flow from operations even after the outlook for Brent crude prices to 2018 dropped by $10 to $15 a barrel since the deal was announced in April.

Oil’s renewed slump to a six-year low in August prompted some investors to question the logic of the acquisition, valued at $70 billion when it was announced. Shell expects the deal to expand its access to oil reserves in Brazil, gas projects from Australia to Tanzania, and its global liquefied natural gas transport and marketing infrastructure. The company’s gas business will be separated into a stand-alone unit to be led by Maarten Wetselaar.

“It’s a defense of the BG takeover, with the higher savings from synergies,” said Jason Gammel, a London-based analyst with Jefferies International Ltd. “It shows integrated gas becomes that much more important after the BG deal.”

Rejuvenating Shell

The company announced the organizational changes to smooth the way for its biggest-ever takeover amid what it expects to be a prolonged downturn in oil prices.

“BG rejuvenates Shell’s upstream by adding deep water and integrated gas positions that offer attractive returns and cash flow, with growth potential.,” Shell’s Chief Executive Officer Ben Van Beurden said in the statement. “With enhanced positions in both of these themes, Shell can focus on the best positions, and deliver a more structured and predictable investment program.”

Wetselaar will become integrated gas director and a member of the executive committee, the company said. Marvin Odum, currently director of the company’s Upstream Americas unit, will lead a new Unconventional Resources unit, including heavy oil and shale activities in the Americas.

Lower Prices

Last week, Shell reported a third-quarter loss of $7.4 billion, the biggest in at least 16 years after it lowered its long-term outlook for oil and gas prices. The company said in July that the BG acquisition would add to Shell’s cash flow with crude at $67 a barrel in 2016. It said Tuesday that the net asset value Brent crude price break even for the BG deal is currently estimated to be in the mid-$60s.

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Brent crude has dropped 18 percent since the day before Shell’s announcement of the takeover. The December contract traded at $48.55 a barrel as of 8:27 a.m. in London. When Shell announced the BG deal in April, it assumed oil would rise to $90 by 2018. Brent crude will average $70.12 that year, according to analyst estimates compiled by Bloomberg.

Shell in early April offered0.4454 of its own B shares and 383 pence in cash for each BG share. The B shares traded 0.9 percent higher at 1,729.50 pence as of 8:41 a.m. in London. The stock has dropped 22 percent since the day before the deal was announced while BG has gained 14 percent. BG’s shares are still 9.5 percent below Shell’s implied offer price.

Shell is targeting $11 billion cost savings this year, including a 10 percent reduction in operating costs and 20 percent lower capital spending, according to the statement. It plans to sell $20 billion of assets in the two years to the end of 2015 and reiterated a plan to dispose a further $30 billion from 2016 to 2018, following the acquisition of BG.

The company also expects exploration spending for the combined group to be less than $3 billion in 2018, a 40 percent reduction from 2014 levels. The combined capital investment for Shell and BG in 2016 is expected to be around $35 billion, according to the statement on Tuesday.

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