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Oil Fundamentals Overturn Geopolitical Risk

Oil Fundamentals Overturn Geopolitical Risk

Geopolitical risk from Iraq and…

Shell-BG Merger Green-lighted By Shareholders

Shell-BG Merger Green-lighted By Shareholders

Shareholders of Royal Dutch Shell and BG Group have given their final approval to a merger of the companies, despite concern among some Shell shareholders that the Anglo-Dutch energy giant was paying too much for the union.

The Shell shareholders, meeting in The Hague on Wednesday, voted 83 percent in favor of Shell's purchase of its smaller rival, and BG shareholders, who will benefit from the high price of the transaction, did the same during a meeting in London on Thursday. The deal will become final on Feb. 15.

The merger not only would make Shell the world's largest producer of liquid natural gas (LNG), a position now held by ExxonMobil Corp., but also would make it the largest publicly owned company in Britain.

When Shell CEO Ben van Beurden announced his intention to buy BG in April, his offering price was close to $70 billion. But that was nine months after the average global price of oil began its plunge, along with the value of Shell's stock, and as oil prices have continued to fall, the transaction's value has declined to about $51 billion.

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Even that price, though, was seen as a lot to spend by a company, no matter how large, that has been hit so hard by the depressed oil market. Before the vote, one large Shell investor, Standard Life, the savings and investment company, called the purchase “value destructive” for shareholders, and others have suggested a renegotiation in the terms of the deal.

One private investor, Mark Van Baal, who leads a coalition of small shareholders of Shell, said he wasn't backing the deal because “[t]here are a lot better ways to spend [$51 billion].”

Another small investor told the Financial Times, “In a world with $30 [per-barrel oil], the number that will roll out of the model will look terrible. …  At $100 [oil], this deal will look the steal of the century.”

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A third individual shareholder, Gavin Palmer, said the timing was wrong because energy's production costs are now exceeding market price. “When you are buying something and the oil price goes down so much that the assets cost more to get out the ground than they are worth, that is not an asset, that is a liability,” he said.

But such views were in the minority, with most investors evidently convinced that van Beurden's long-term plans of growing its LNG business would pay off eventually. BG is one of the world's leading LNG companies, with generous output from its operations off the coasts of East Africa, Brazil and Australia.

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Van Beurden has said repeatedly that the buying BG eventually will be financially beneficial to Shell, in part because of an expected increase in LNG sales, and in part because Shell can save money by reducing redundancies in the two companies. And shortly before the Shell vote, he said the merger would “provide a springboard to reshape” his company.

“It is a tremendous opportunity to create value for BG shareholders and our Shell holders,” van Beurden said. “It will accelerate and de-risk our strategy.”

Shell says the persistent plunge in oil prices, which began in June 2014, means the company may have to wait longer than originally expected to profit from its purchase of BG. Last month the company said that if the deal is approved, it wouldn't begin to see profits from the merger until the price of a barrel of oil begins to inch above $60 per barrel.

By Andy Tully of Oilprice.com

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