Time, and oil prices, ticking for Shell-BG deal

Wed Apr 29, 2015 6:11pm EDT
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By Dmitry Zhdannikov, Sinead Cruise and Ron Bousso

LONDON (Reuters) - Rising oil prices are putting Royal Dutch Shell under pressure to execute its landmark $70 billion deal to buy rival BG as soon as possible before investors in BG start to take a more critical look at the terms.

Announced three weeks ago, the deal was seen as a bold bet by Shell on the oil price recovering to $80-$90 per barrel within three years, justifying a 50 percent premium the Anglo-Dutch giant agreed to pay for BG in the biggest oil merger of the decade.

The cash and share deal followed a relatively low oil price of around $55 per barrel during the first three months of 2015.

That means the conversion rate was arguably more favorable for Shell shareholders as its stock is more resilient during periods of cheaper oil. BG stock tends to perform better when the oil price recovers because it eases concerns over the development of expensive projects, such as in Brazil and East Africa.

Since the cash and stock deal was first discussed by Shell and BG's executives over a phone call in mid- March, the price of oil has risen by 25 percent to $65 per barrel.

Given that the deal was based on the average share price of BG stock in the three months to April 7, BG's shareholders risk feeling they are not getting full value for that oil bounce.

"The maths would suggest that were the oil price at or above $80 then Shell would be snaring BG for a very attractive price," said Matthew Beesley, head of global equities at Henderson, which has $81 billion under management including BG's stock.

"While the total determination is of course dependent on the level of Shell shares at the time of issuance to BG shareholders, above $80 its not inconceivable that BG shareholders could start to agitate for a higher bid or indeed a competing bid," added Beesley.   Continued...

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