Shell share price: energy giant rallying shareholder support for BG merger

By: Veselin Valchev
Veselin Valchev
Veselin is a data scientist with extensive experience in commodities and natural resources within the FTSE 100. His data… read more.
on Jan 8, 2016
Updated: Mar 11, 2020

Royal Dutch Shell Plc (LON:RDSA) is confident that shareholders will back the proposed £37 billion takeover of fellow energy giant BG Group, despite the low oil price putting in question the financial viability of the deal.

When Shell announced the deal in April, oil was hovering at about $50 per barrel, and the Anglo-Dutch oil major said the merger would be economically viable with oil prices averaging $70 per barrel.
The price of oil has, however, continued falling since, and there has been concern that Shell investors may oppose the merger, with the oil major widely seen as overpaying for BG in the current oil price environment.
In address to those concerns, the company put forward a new projection requiring oil to average $60 for the deal to work, and then urged investors to focus on the indisputable long-term benefits of the deal, as opposed to the near-term financials of the transaction.
In a series of investor meetings over the past few days, however, Shell has put forward a fresh projection, estimating that the deal would work with oil averaging $50 per barrel over the next two years, sources familiar with the situation said for Reuters yesterday.
To weather such an environment, Shell plans to cut capital spending further below the planned $35 billion for 2016, delay share buybacks and extend scrip dividends, where investors are offered discounted shares instead of cash, finance chief Simon Henry told analysts.
Shell plans to keep the size of its dividend unchanged, however.
Shell has outlined plans to sell $30 billion of assets over the next three years in order to finance the deal.
The company has also announced a set of spending cuts, most recently putting forward plans to cut 2,800 jobs as part of the combined group’s administrative consolidation.

”Shell is better off with BG assets than without them”

In a separate development, Institutional Shareholder Services, a proxy advisory body, is expected to recommend that investors support the deal, FT reported yesterday, citing people familiar with the situation. The move would significantly reinforce the “yes” camp, analysts noted.
Shell voiced confidence that the shareholder vote over the merger will have no trouble passing the 50-percent approval threshold required for the deal to go through, investors said.
“It is unfortunate that the oil price has fallen since the deal was first agreed … But, significantly, Shell is better off with BG assets than without them,” James Maltin, investment director at Rathbones, a shareholder in both Shell and BG, said as quoted by the Financial Times. “The long-term oil price is probably higher than the current price and that is what you have to think about as a long-term investor.”
BG’s share price, however, which has failed to close the 10-percent gap to the proposed price offered by Shell, reveals there is still uncertainty over the deal amongst investors.
Still, the merger has acquired all mandatory regulatory approvals, and Shell has dismissed the notion that it could renegotiate the deal, pointing to the uncertainties stemming from the required “cooling-off” period.
Shell is scheduled to continue with more investor meetings over the coming week, as it drums up support for the deal.
Shell and BG’s shareholders are set to vote on the merger on January 27 and 28, respectively, with Shell required to secure backing from 50 percent of its shareholders, while BG must win approval from 75 percent of its investors. The merger is likely to become effective February 15, Shell has said.
Shell’s share price again opened on the downside today, dropping 1.03 percent to 1,439.50p as of 08:05 GMT. Yesterday, the Anglo-Dutch company closed with a 2.9 percent loss, as oil prices slid below $33 per barrel following bearish data out of China and the US.
Even at an 11-year low, however, oil could drop as low as $20-25 per barrel before the trend reverses, analysts noted.
“The ‘bear-fest’ has now begun,” PVM technical analyst Robin Bieber said as quoted by Reuters. “The trend is down and likely to accelerate lower – it is not advised to be long. There are targets lower and these are likely to be mere staging posts on a much bigger move south.”
As of 08:19 GMT, Friday, 08 January, Royal Dutch Shell Plc ‘A’ share price is 1,454.50p.

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