Shell needs to go beyond oil price bet in BG deal

Fri Apr 10, 2015 5:58am EDT
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By Dmitry Zhdannikov

LONDON (Reuters) - When it comes to forecasting the oil price, big companies play their cards very close to their chests.

But the 50 percent premium that Royal Dutch Shell agreed to pay this week in a stock and cash deal to acquire smaller rival BG says a lot about Shell's expectations for a swift recovery in oil prices.

The beauty of the deal and the upside, though, won't be in the bold bet on oil prices rising to $90 per barrel turning good, say investors and analysts as they urge Shell to use the deal as a opportunity to review its portfolio and geography.

"The upside comes in the deal becoming a catalyst for change in transforming the upstream business over the next 4-5 years in a way that the previous pivot towards North American onshore really failed to do, in our view," UBS said on Thursday.

Pascal Menges from the Lombard Odier Global Energy fund said Shell’s deal heralded a scrabble by Big Oil to improve the overall quality of portfolios.

"Management will have their work cut out to execute the deal and generate synergies and assets sales. The risk of indigestion is not small," he said.

Analysts from Barclays agreed that because the BG deal brings Shell rich reserves and production outlook in Brazil, it hoped it would prompt the company to slow down or relinquish less competitive assets.

"This includes high breakeven projects such as Shell's heavy oil portfolio in Canada, assets difficult to develop such as those in the Arctic and projects in geopolitically unstable regions such as those in Iraq and onshore Nigeria," it said.   Continued...

Shell's company logo is pictured at a gas station in Zurich April 8, 2015. REUTERS/Arnd Wiegmann