#Shell to Buy #BG Group for 50% premium- 30% cash-70% shares

From BMO:

CONCLUSION: positive for the oil & Gas sector overall. Main take aways are:

1-      Puts a value on Brazil assets

2-      Large synergies announced of $2.5BN comprising $1bn operating cost savings (corporate, admin, IT, efficiencies in marketing/shipping and procurement) and $1.5bn reduction in exploration expenditure

3-      Accretive starting in 2016

4-      Not too many overlaps. Shell is not very present in Brazil and has limited exposure to LNG in Asia.

5-      For North America, may help their respective LNG projects in British Columbia, Canada. Beneficiaries would be ARX CN on the production side and SE US and TRP CN on the infrastructure side.

6-      There is a £750m break fee with a long stop date 31 July 2016. The deal is expected to close in 1Q16.

BG has confirmed a recommended cash and shares offer from RD Shell

·       BG shareholders will get 383p cash and 0.4454 RDSB shares per BG share. This equates to 1367p at last night’s closing prices (50% premium) or 1350p at the 90d average prices.

·       The price tag is a significant premium to our SOTP of 1000p at $80/bbl Brent and is discounting something closer to $90 oil.

·       The deal should allow (relatively new) CEO Ben van Beurden to continue to high grade RDS’s portfolio, increase asset sales and boost the share buyback, which it confirms will recommence in 2017. 

·       RD Shell believes it can extract $2.5bn pa synergies from the deal and that it will be accretive to operating cash flow from 2016.

·       The main attraction of BG lies in its significant positions in Brazil (pre-salt) and Australia/LNG. Brazil accounts for 37% of our NAV and Australia/LNG a further 33%. 

·       We believe that the two portfolios are complementary with minimal overlap in regions such as the UK North Sea (6% of BG).

·       Read across -  Positive for M&A theme in the sector.  Companies such as Tullow (TLW LN) offer a combination of scale and value, trading at a 32% discount to our core NAV of 430p. The deal is particularly positive for GALP (GALP PL), which has the biggest concentration of NAV in Brazil. Our core NAV for GALP is €11.

BG Group core NAV breakdown

E&P sector NAVs