Dear PGM Capital Blog readers,
In this weekend’s blog edition we want to elaborate on the biggest energy deal in a decade: Royal Dutch Shell, (LSE:RDSA) buying BG Group plc (LSE:BG), for 70 billion US-Dollars.
ABOUT ROYAL DUTCH SHELL:
Royal Dutch Shell plc, is an Anglo-Dutch company that operates as an independent oil and gas company worldwide.
Business Summary:
- The company explores for and extracts crude oil, natural gas and convert them into a range of refined products, including:
- Gasoline, diesel, heating oil, aviation fuel, marine fuel, lubricants, bitumen, sulphur, and LPG
- Markets and trades; natural gas, fuels, petrochemicals, lubricants, bitumen, and liquefied petroleum gas (LPG) for home, transport, and industrial use.
- The company holds interests in approximately 24 refineries; 1,500 storage tanks; and 150 distribution facilities
The company was created in February 1907 through the amalgamation of two rival companies: Royal Dutch Petroleum Company and the “Shell” Transport and Trading Company Ltd of the United Kingdom.
- Royal Dutch Petroleum Company was a Dutch company founded in 1890 to develop an oilfield in Sumatra.
- The “Shell” Transport and Trading Company was a British company, founded in 1897 which expanded in 1833 to import and sell sea-shells, after which the company “Shell” took its name.
- The terms of the merger gave 60 percent ownership of the new group to the Dutch arm and 40 percent to the British.
The company has its headquarter in The Hague, The Netherlands and its registered office, in London, United Kingdom and is the biggest company by market capitalization on the Amsterdam Exchange as well as on the London Stock Exchange.
The company before this merger, was ranked by market capitalization as the second biggest energy company – behind Exxon-Mobile (NYSE:XOM). Worldwide the company is ranked on position 12 by market capitalization.
Below figure shows the 10-year chart of the stock of the company.
ABOUT BG GROUP:
BG Group plc is a British multinational oil and gas company headquartered in Reading, United Kingdom.
It has operations in 25 countries across Africa, Asia, Australasia, Europe, North America and South America and produces around 680,000 barrels of oil equivalent per day. It has a major Liquefied Natural Gas (LNG) business and is the largest supplier of LNG to the United States. As of December 31, 2009 it had total proven commercial reserves of 2.6 billion barrels (410,000,000 m3) of oil equivalent.
BG Group is listed on the London Stock Exchange and is a constituent of the FTSE 100 Index, under the symbol (BG.L)
At the close of the market on Friday, April 10, 2015, it had a market capitalization of £39 billion, the seventh-largest company listed on the London Stock Exchange.
Below figure shows the 10-year chart of the stock of the company.
THE MEGA DEAL:
On Wednesday, April 8th, Royal Dutch Shell announced it will buy BG for US$70 billion, a move that will add considerably to the oil giant’s capacity and profits in two areas: deep-water drilling and liquefied natural gas (LNG).
Part of the deal’s attraction is the precipitous drop in oil prices we’ve seen since mid-2014. Since both Shell and BG are also into oil in a big way, that’s allowed Shell to snap up BG’s assets at relatively cheap prices, despite paying 50 percent more than BG’s closing share price on Tuesday.
PGM CAPITAL COMMENTS:
The third-biggest oil and gas deal ever by enterprise value will bring Shell assets in Brazil, East Africa, Australia, Kazakhstan and Egypt.
Gaining greater access to Brazil’s deep water oil reserves was one of the key motivations behind Shell’s $70 billion acquisition of BG on Wednesday. Shell’s CEO Ben van Buuren, also cited Australian natural gas drilling blocks owned by BG as another reason for the acquisition. But when it comes to drama-free oil, Brazil is as good as it gets.
Shell’s access to Brazilian deep sea oil deposits is less than BG at the moment. Shell only has drilling rights in the so-called Libra Basin, while BG has drilling rights to blocks in Iara, Sapinhoá, Lapa and the Lulabraz (formerly Tupi) oil fields.
The consolidation will ostensibly allow Shell to combat those falling prices by eliminating overlapping costs, and to immediately expand its oil and gas reserves by 20 percent while upping annual production by 20 percent. The LNG market is also expected to keep expanding, as China, in particular, moves off coal to reduce air pollution.
The merger will make the combined company – Royal Dutch Shell-BG Group- the biggest oil company by market capitalization, putting Exxon-Mobile behind them on the second place.
PETROCHINA OVERTAKES EXXON MOBILE AS BIGGEST OIL COMPANY:
On Friday April 10th, PetroChina Co. (HKE: 0857) passed Exxon Mobil Corp. as the biggest energy company by market value for the first time since 2010 as can be seen from below chart.
As can be seen from above chart, Exxon’s capitalization was US$352.6 billion through Thursday April 9, compared with PetroChina’s US$352.8 billion as of 1:36 p.m. in Shanghai.
The Chinese company’s A shares surged about 61 percent the past year, versus Exxon’s 14 percent drop. PetroChina was larger by value most recently at the close of trading on June 25, 2010.
Below figure shows the 10-year chart of the stock for Exxon Mobile versus the one of Petrochina, in which clearly can be seen how the stock of Petrochina has outperformed the one of Exxon-Mobile.
With this new development, Exxon-Mobile will be pushed to the third place, behind Royal Dutch Shell -No2- and Petrochina -No1-, after completion of the merger between Royal Dutch Shell and BG-Group.
Based on its fundamentals, strong balance sheet, P/E ratio of 11.1 and a dividend yield of 4.4% we have a STRONG BUY rating on the shares of PetroChina.
With an P/E ratio of 12.7, strong balance sheet and an dividend yield of 4.7% we have a BUY rating on the stocks of Royal Dutch Shell and consider it as a good hedge against the week Euro and current low Oil prices.
Before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of Commodities, Precious metals as well as the stocks of their producers can be very volatile and that sharp corrections may happen in the short term.
Until next week.
Yours sincerely,
Eric Panneflek