Why mega-merger is so important for Shell

Tank B, Curtis Island, Queensland, Australia Image copyright BG Group
Image caption BG Group has a strong presence in liquefied natural gas in Australia

It was President Barack Obama's chief of staff, Rahm Emanuel, who once said, "Never let a good crisis go to waste."

For the energy sector, the crisis this time is the falling oil price. At $58 a barrel for Brent crude, it is almost half the peak figure last year.

That has meant that energy companies have had to cut their cloth, reducing levels of investment and writing down the value of assets.

BG Group has been particularly hard hit. Profit warnings following problems in Egypt and Brazil, the departure of Chris Finlayson, its former chief executive, after only 16 months, and a sinking share price have made it a takeover target.

There were rumours that Exxon Mobil was preparing an offer at Christmas.

And senior figures close to Shell told me this morning that there were people in the company who had been working on a plan to buy BG Group for so long, many of them had retired. Shell has long seen the point of buying BG Group.

In the worldwide hunt for energy, Shell has now made a £47bn bet that buying access to new reserves is quicker and easier than finding them itself.

Its exploration project in Alaska, for example, has yet to discover any recoverable reserves, whereas this deal immediately increases Shell's oil and gas reserves by 25%.


And don't forget, BG Group is one of the biggest suppliers of natural gas to China, one of the world's fastest growing markets, which Shell will find very attractive.

Shell's takeover of BG Group could be the first of a number of mega-deals in the oil and gas industry as predators and prey circle one another.

Marc Kimsey, senior trader at Accendo Markets, got it right when he said this morning: "The deal between Royal Dutch Shell and BG Group will prompt sector consolidation.

"The decline in oil price over the past year has battered some stocks which are clearly now looking attractive.

"In the last year BG shares fell 30%, shares in Tullow Oil have fallen 65%, Premier Oil down 55% and Petrofac down 20%.

"By comparison, sector behemoths BP and Royal Dutch Shell have only shed 10% over the same period, leaving them in the position of predator rather than prey."

With significant downstream businesses - that's the bit that consumers see, such as the sale of petrol and refined oil products - a lower oil price means profits can still be healthy for Shell and BP as the profit margins for downstream businesses improve.

Yes, the Shell offer does come with a rich premium - 50% above BG Group's 90-day average share price - but those close to Shell point out that before its travails, BG Group's share price was above £13.

The market judges that there is certainly value there.

There are also some significant tests. Last year, BG Group made a loss and it is a company with serious challenges.

It overspent on US shale gas exploration, gas production has struggled amidst political unrest in Egypt and costs are rising in key markets Brazil and Australia.

Shell is also taking on more debt to finance the deal, which might put pressure on dividends.

Shell already pays out 8% of all publicly quoted company dividends to our pension and savings schemes. With BG Group, Shell would pay out more than 10% of the total.

So its dividends policy is important for millions of us.

Jason Gammel, of Jefferies Research, said: "The imperative now becomes for management to convince the market of the financial implications - near-term earnings dilution, a significantly more levered balance sheet and a higher priority for debt reduction versus dividends on cash utilisation."

Although a small part of the overall business for both Shell and BG Group, the North Sea is of course important for the UK.

Shell employs 2,400 people supporting its North Sea oil operations and has already announced some job losses.

BG Group employs 1,500 in Aberdeen and at its headquarters in Reading.

In a major deal like this one, businesses talk about "synergies". That's another word for cost savings and efficiencies.

And although the Shell chief executive said the company remained committed to the North Sea, concern over the number of jobs the new, amalgamated company will need will be an important one to resolve.