Sector News

Shell's BG acquisition wins key endorsement

January 8, 2016

(Reuters) – A major shareholder advisory firm on Friday recommended investors vote in favor of Royal Dutch Shell’s $51 billion acquisition of BG Group, saying a downturn in oil markets did not detract from the deal’s strategic benefits.

The endorsement by the Institutional Shareholder Services (ISS) is a major boost for Chief Executive Ben van Beurden’s drive to win the required shareholder support in a January 27 vote.

Few investors or analysts have challenged the deal’s strategic benefits for Shell, which will become the world’s top liquefied natural gas (LNG) trader and a major offshore oil producer.

But with crude oil prices languishing near 12-year lows of around $34 a barrel with forecasts of a slow recovery, investors have raised concerns about the viability of the cash-and-share deal that would increase Shell’s debt burden.

“Investors may understandably be discomforted by the significant volatility in global spot prices for oil. It is worth recognizing, however, that the spot price today may be of very little value in assessing the strategic opportunity of a transaction whose benefits will be realized over decades,” ISS said in a report.

“Given the compelling strategic rationale, and the significant positive economics to be realized within a relatively short time frame, support for the transaction is warranted.”

ISS advises around 5 percent of Shell’s shareholders, according to sources.

On Wednesday, Chief Financial Officer Simon Henry told analysts Shell had conducted stress tests that showed it could withstand oil at $50 a barrel over the next two years, its lowest estimate to date as it seeks to secure shareholder support, sources told Reuters.

To weather such an environment, Shell plans to cut capital spending further below the planned $33 billion for 2016, delay share buybacks and extend scrip dividends, where investors are offered discounted shares instead of cash, Henry told analysts.

ISS said that the combination would allow Shell to replenish oil and gas reserves, lower production costs and ensure dividend coverage “at what seems an opportunistic point” due to BG’s financial profile and the oil market’s cycle.

“There is credible evidence… that the price Shell is paying is reasonable even considering the decline in oil prices and oil stocks since the deal was announced.”

Royal Dutch Shell shares were down 2.9 percent at 1100 GMT, compared with a 1.3 percent decline for the broader sector index.

(Reporting by Karolin Schaps; Editing by Alexander Smith and Adrian Croft)

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