Royal Dutch Shell is ready to acquire rival BG Group for $70 billion to bridge the gap on market leader US Exxon Mobil after a fall in prices. This is the first major oil industry merger that is happening after a decade.
Shell will pay the pay the equivalent of $20.46 in cash and stock for each share of the BG group, 50% more than Tuesday’s closing price. The deal is expected to increase Shell’s oil and gas reserves by 25%, that included the offshore projects in Australia and Brazil, and give it a bigger presence in the fast-growing liquefied natural gas market, the company said.
This merger will give Shell access to BG’s multibillion-dollar operations in Brazil, east Africa, Australia, Kazakhstan and Egypt. These consist of some of the world’s most ambitious liquefied natural gas projects. The deal between the Shell and BG puts a premium on access to proven assets rather than costly exploration.
Van Beurden, the chief executive of Shell told at a conference, “We have been scanning quite a few opportunities with BG always being at the top of the list of prospects to combine with. We have two very strong portfolios combining globally in deep water and integrated gas. The company expects the deal would enhance its proven oil and gas reserve by 25%.
After the fall in the oil prices caused by the increased production in U.S , other energy company giants may look to grow through acquisitions. The previous oil merger that happened a decade ago was after the new production from the North Sea, Alaska and Mexico led to excess global capacity and companies joined hands to shield themselves or bought weaker rivals at lower rates.
The merger may create a new wave of mega-merger like in 1990s. Some companies are under lost of cost pressure with the oil price showing no signs of recovering. $100 per barrel used to the usual price but now may need $40 to $60 per barrel to break even. So it is very likely to witness more such deals in near future.
The international price of crude oil has fallen from more than $115 per barrel last summer to around $45 before recovering itself to $58 per barrel. Prices of global natural gas prices have dropped as most of the natural gas traded internationally is related to the price of oil.
The merging with the BG Group allows Shell to replace reserves at a time when exploration budgets are being let go and after its tries to join the U.S shale book did not matter too much, said an analyst.