The Shell BG deal will be the first of many – which oil giant is next?

Shell's takeover of BG Group will spark a wave of mergers in the energy sector. John Stepek asks – who will be next?

Shell CEO Ben van Beurden (left) and BG Group chairman Andrew Gould shake on the deal

Of all the takeover rumours that constantly ride the City merry-go-round, the idea that Royal Dutch Shell would one day buy BG has to be one of the most persistent.

And now it's no longer a rumour.

Shell is buying BG for the equivalent of £13.50 a share. That's roughly 50% over and above the prevailing share price before the news came out.

Advertisement - Article continues below

That's great news if you're a relatively recent BG shareholder, clearly. What the rest of us want to know now is who's next?

This is one of the biggest deals ever

On another interesting point, James Mackintosh notes in his FT column that the Shell BG deal is the ninth-biggest merger deal ever. That's not good company to keep five of the top ten were tech-bubble era deals, and three came just before the Lehman Brothers bust. In other words, this sort of scale of deal tends to happen before crashes.

However, while I'd agree that shares in general are overvalued, it's hard to make the case that this specific instance is about chief executive ego gone mad. Instead, it looks Shell is taking advantage of the plunging oil price to make a move.

Why is Shell buying BG? If there's one thing an oil and gas company needs, it's a plentiful source of oil and gas for the future. And the simple answer is that, right now, it's easier and cheaper to buy BG than for Shell to find more of its own reserves.

Advertisement - Article continues below
Advertisement - Article continues below

The BG deal will increase Shell's oil and gas reserves by around 25%. And it'll boost production by 20%. According to the FT, by 2018, Shell could be producing more oil and gas than ExxonMobil currently the biggest non-state producer. It's already the global leader in liquefied natural gas, and this deal will cement that.

That's good news for Shell. By comparison to some of the other big players, Shell has had problems replacing the reserves it has already pumped out.

BG directors have recommended the deal, and it's likely to be completed by early 2016. If you own BG, it's probably worth hanging on for now at least you never know, someone else might fancy coming in with a higher bid.

As for the rest of the sector, the big question now has to be who's next?

We're going to see a wave of mergers in the oil sector

In other words, expect more mergers and takeovers. ExxonMobil has already mentioned that it's open to the idea of doing deals. And Bob Dudley at BP noted that he expected the oil price environment to remain similar to the 1980s, which is when many of the mega-mergers that shaped today's oil giants took place.

Advertisement - Article continues below

The other point to remember is that chief executives are just like everyone else. They see action and they start to panic they want to be part of it. Their shareholders will be asking why they're not doing deals too. Fee-hungry bankers will be putting ideas in their heads. Their own egos will look enviously on the praise being heaped on Shell boss Ben van Beurden by an excitable press.

As the BG deal shows, pretty much no one is safe. Even a big player like BP has frequently been cited as a possible target you have to imagine that someone out there is running the slide rule over it.

And elsewhere in the sector, all those funds out there with money to spend on distressed' assets will now be looking to act before someone else does. The last thing they want is takeover fever driving up prices and leaving them stranded.

So regardless of what happens to the oil price and with Iran coming back online potentially, we could be looking at a suppressed price for quite some time it looks like share prices in the sector are set to benefit from a wave of speculation.

We looked at the oil sector, and flagged up some potential ways to play a merger boom, in a recent issue of MoneyWeek magazine. Subscribers can read the piece here and if you're not already a subscriber, sign up to get your first four issues free here.



Global Economy

What escalating tension between Iran and the US means for oil prices

The tension between the US and Iran is unlikely to mean all-out war in the Middle East. But markets may be getting a little too complacent about its e…
6 Jan 2020

Rising output will keep a lid on the oil price

Oil exporters’ cartel Opec gave further encouragement to the bulls this month after agreeing to new production curbs.
20 Dec 2019

Brace yourself for pricier oil

Global growth, and hence demand for oil, could surprise on the upside next year, leading to a bounce in the oil price.
29 Nov 2019

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019

Most Popular


These seven charts show exactly why you must own gold today

Covid-19 is accelerating many trends that were already in existence. The rising gold price is one such trend. These seven charts, says Dominic Frisby,…
3 Jun 2020

Disease, rioting and mass unemployment – so why are markets soaring?

Despite some pretty strong headwinds in the last year, America’s S&P 500 stock index is close to all-time highs. John Stepek explains why markets seem…
4 Jun 2020

This looks like the biggest opportunity in today’s markets

With low interest rates and constant money-printing, most assets have become expensive. But one major asset class hasn’t. John Stepek explains why com…
2 Jun 2020