By Selina Williams and Sarah Kent
LONDON--Petroleum giant Royal Dutch Shell PLC has agreed to buy
BG Group PLC for about $70 billion, in a deal that would create the
world's largest independent producer of liquidated natural gas amid
a historic downturn in energy prices.
The deal, which confirms an earlier report by The Wall Street
Journal, brings together two companies that have been buffeted by a
sharp drop in oil and gas prices since last summer and would enable
the two European energy giants to eliminate overlapping costs to
help offset the impact of weaker prices.
It would be the first major energy acquisition since oil prices
began a long slide last July that slashed the cost of a barrel of
Brent crude, the global benchmark, from $114 to less than $60. It
would be among the largest oil-and-gas deals of the past 20 years,
according to Dealogic.
The deal, if approved by shareholders and regulators, would make
Shell the world's largest producer of liquefied natural gas, Shell
CEO Ben van Beurden said on a conference call. The purchase of BG's
assets also would put it at the forefront of the competition among
big, international oil companies to land the pole position in the
race to dominate the global liquefied gas market, including BG's
first rights on U.S. LNG exports in early 2016. Liquefied natural
gas, or LNG, is shipped on specialized vessels around the
world.
By applying its capabilities to the BG assets, Shell believes
that, by around 2020, the combined group will have two strategic
growth businesses--deep water and integrated gas--that could
potentially each generate $15 billion to $20 billion of cash flow
from operations a year, the statement said. BG has valuable oil and
gas fields off the shore of Brazil and gas plays off of East Africa
and on shore in Australia--assets that many analysts said were too
big for BG to handle.
"LNG is a very important component of this," Shell CEO Mr. van
Beurden said, adding that BG was at the top of the list of a number
of companies Shell was considering buying. "The whole idea is that
we turn the company on the back of this deal into a much more
focused company, very, very strong in gas and very, very strong in
deep water."
The deal was first broached in a phone call from Mr. van Beurden
to BG Chairman Andrew Gould.
"It was very simple. I called Andrew up and we had a very good
and constructive discussion about the idea and it very quickly
seemed to make sense to both of us," Mr. van Beurden said.
Shell will pay a 50% premium to BG's closing share price Tuesday
of 910.4 pence, with the offer consisting of 383 pence in cash and
0.4454 Shell B shares, giving BG shareholders a 19% stake in the
combined company. The deal is expected to close in early 2016, Mr.
van Beurden said, with no major competition issues foreseen.
Mr. van Beurden said the company would pay a dividend of $1.88 a
share in 2015 and at least the same in 2016. A share buyback
program of at least $25 billion is planned for 2017 to 2020.
However, while Shell and BG both trumpeted the benefits of the
deal, some analysts were skeptical.
"Shell's track record of executing on acquisitions has not
exactly been stellar over the past decade," said Michael Hulme,
commodities fund manager at Carmignac Gestion. "To assume that
Shell can pay a 50% premium for BG, and extract significant
synergies, deliver value for shareholders, and maintain a dividend
on an expanded shareholder base would require a more-than-healthy
degree of optimism."
Shares in Shell fell 5% in early trading in London, while BG
stock rose 37%. The deal provided a lift to stocks across Europe,
with the oil-and-gas subindex of the Stoxx Europe 600 index surging
5.5% in early trade.
For Shell, the deal would shore up its weakening reserves--the
company replaced only 26% of the oil and gas it extracted last
year--while playing to its technological strengths in taking over
BG's assets. It would also allow Shell to reduce its exploration
spending at a time of low crude prices, Mr. van Beurden told
analysts.
Shell Chief Financial Officer Simon Henry said the deal wasn't
designed to be profitable at any particular oil price. Mr. van
Beurden said the company would focus on paying down its debt, and
the deal would "be the springboard for a more ambitious phase of
portfolio restructuring and refocusing."
BG, which emerged from the break up of British Gas, has had a
tough time in recent years, with its shares falling by about 30%
from a peak last spring.
Investors have been disappointed after it failed to deliver on
promises of production growth. BG said in February it was writing
down the value of its oil-and-gas assets by nearly $9 billion as it
adjusts to the plunge in oil prices by roughly half since last
summer.
Mr. Lund, BG's CEO, took the helm of the British company in
February, joining from Norway's Statoil, where he was renowned for
his deal-making expertise.
BG's Mr. Gould said he remained confident in the company's
long-term prospects, but felt the offer from Shell would allow BG
to return shareholder value more quickly.
Mr. Gould said Mr. Lund would remain CEO of BG to ensure a
smooth transition should the offer complete and would then probably
"move along."
Justin Scheck contributed to this article.
Write to Selina Williams at selina.williams@wsj.com and Sarah
Kent at sarah.kent@wsj.com
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