Shell-BG megadeal could push others in oil patch to rethink growth

Share

Royal Dutch Shell PLC's megadeal for Britain's BG Group PLC is forcing rival oil companies to re-evaluate their growth strategies and look for value in depressed equity prices as crude prices languish near multiyear lows.

Shell announced Tuesday that it will spend £47.7-billion ($87.7-billion) in cash and shares to acquire BG, which is focused on natural gas production, liquefaction and transportation with operations around the world, including a partnering in a proposed LNG plant in British Columbia.

The two companies have little overlap in Canada, although the merger faces regulatory scrutiny in Europe and elsewhere where they compete in natural gas markets.

The proposed deal would be the third-largest oil and gas merger in history, behind Exxon Corp.'s acquisition of Mobil Corp. in 1998 and the 2004 marriage between Royal Dutch Petroleum and Shell Transport and Trading that created the current Anglo-Dutch supermajor. It also ends a relative dry spell for blockbuster oil-industry mergers and acquisitions.

"We believe this [deal] proves an M&A wave is with us through 2016, which will be bigger than ever," said Ryan Mendy, chief operating officer at Britain-based Edge Consulting Group, an independent consulting firm. It will force other companies "to focus on their own potential strategies. The remaining companies are now forced to either push to survive alone, spin off a segment to streamline and unlock value for investors, or find a partner like Shell-BG to attract new opportunities."

Global benchmark Brent crude, traded at $55.55 (U.S.) a barrel on Wednesday, about half of its value in July.

Mr. Mendy said the push for acquisitions is being driven by the vast market of underpriced assets available, excellent access to cheap capital provided by global investment banks to the right buyers, and senior management's desire to achieve growth in a low-price environment.

Mr. Mendy pointed to companies such as Italy's Eni SpA, France's Total SA, and Britain's BP PLC as likely merger partners or targets for acquisition.

But other analysts argue the Shell-BG deal won't be a catalyst for other majors to follow suit.

There have few deals above $10-billion since ExxonMobil acquired XTO Corp. in 2010. (One exception: CNOOC Ltd.'s $15.1-billion takeover of Calgary-based Nexen Inc, which was announced in July 2012.)

The largest recent Canadian transaction was the $8.3-billion takeover of struggling Calgary-based Talisman Energy Inc. by Spain's Repsol SA, announced in December.

During the good times, asset values were too high for many prospective buyers. But since the price meltdown, would-be buyers are demanding bargain prices that sellers can't accept, said Pavel Molchanov, Houston-based analyst at Raymond James Financial Inc.

"Insofar as there has been M&A, it has tended to be targeted at individual assets rather than corporate deals," he said. "To be clear, we don't look at Shell-BG as the harbinger of a megadeal boom."

Mr. Molchanov said Shell has targeted a rival with few assets in the United States or Canada. "It's also a useful reminder that North America is not the only 'horse at the show,' and industry interest in other regions should not be underestimated," he said.

In Canada, smaller companies with strong balance sheets and relatively low capital costs, such as Whitecap Resources Ltd., Raging River Exploration Inc. and Tourmaline Oil Corp., have acquired assets and rival companies during the slump. This type of activity is expected to accelerate if crude prices remain under pressure.

The fate of the larger domestic companies, such as Encana Corp. and Cenovus Energy Inc., is unclear, but their finances have been under pressure, so much so that each issued more than $1-billion in stock to keep debt levels in check. Both have extensive long-term prospects and depressed share prices that could make them vulnerable to potential acquirers.

In 2012, Exxon Mobil Corp. acquired Celtic Exploration Ltd. for $2.6-billion, boosting its position in the prolific Montney and Duvernay liquids-rich shale gas plays in Western Canada. It is not known if the U.S. oil major or its peers might be interested in bulking up further in Canada, where they all have sizable positions in the oil sands and in other aspects of the business.

"Could it do another deal à la Celtic, where it acquires a significant intermediate-sized company?" said Les Stelmach, portfolio manager with Franklin Bissett Investment Management. "Personally, I think that's more likely than, say, Canadian Natural [Resources Ltd.] buying Cenovus. That would be a real shocker, I think."

Several players have had oil sands assets on the auction block for months, and buyers have largely stayed on the sidelines waiting for prices to drop, even with some of the developers now under creditor protection.

"Frankly, I see deal flow being driven by financially distressed companies working themselves out, allowing bottom-feeders to buy in at low valuations," said Samir Kayande, analyst at ITG Investment Research. "That's quite different from an environment in which acquirers pay equity premiums in order to obtain high quality resource."

Editor's note: An earlier version of this article included an incorrect first name for the chief operating officer of Edge Consulting Group. His name is Ryan Mendy, not Randy as published.