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.

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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.

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.

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.

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.