The City is slathering with excitement at Shell’s £47bn bid for BG group. Its shareholders are less than impressed. The problem for them is that the price represents a 50 per cent premium to where BG shares languished prior to the deal’s announcement. To make it pay, Shell really needs the oil price to move up to $90, and quickly.
The question its investors have to ask themselves is whether Shell could pick up something like BG’s portfolio, the opportunity it represents and the earnings stream it generates, with its existing assets and resources.
Even if they think it can, and such an outcome won’t be quick, they still have to ask if they’d be happy for someone else to have BG, the profits of which will at least help to power the generous dividend Shell pays them. A dividend that represents a welter burden to their company.
What is certain is that this will not be the last mega-deal to be done in the energy sector, as its giants seek cheaper alternatives to risking cash they’re not earning on exploration. It likely won’t be the biggest either.
BG’s most likely suitor was long rumoured to be Exxon, the American giant, which represents the most likely threat to this deal’s completion. But Exxon may have it’s eyes cast in the direction of an even bigger B in the form of BP. BG’s drift had become sufficiently aimless that its board felt the need to risk shareholders ire by offering an appalling £25m with nary a condition attached to lure Helge Lund from Norway’s Statoil. He’s now going to sail off into the sunset in a boat filled with cash.
BP’s board might wish it had only that to worry about. For the US lawyers ranged against it, the Deepwater Horizon disaster is the gift that keeps on giving. The company is more than half owned by Americans, it is run by one (Bob Dudley), and it has substantial operations in the country. But they still insist on referring to it as “British” Petroleum across the Atlantic. The logic of putting it formally into American hands via the mega-deal to end all mega-deals with Exxon is that it could take an awful lot of feet from off its neck.
The biggest question amid all this excitement, however, is not over the future of BP, or whether BG is worth it to Shell. It is whether the energy merger mania that has the City cock-a-hoop is as good for the rest of us as it is the bonus boys.
Shell will no doubt argue its overall share of the global energy market is really quite small, even if it pulls this off and becomes the number one in gas as a result.
But that market is now dominated by state actors that are often used as instruments of foreign policy and giants that have too much clout and influence over policy. That is not a good situation to be in given the ruinous impact upon the environment these businesses can have.