Shell says can make BG deal work despite weak oil price

Tue Nov 3, 2015 10:41am EST
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By Ron Bousso and Dmitry Zhdannikov

LONDON (Reuters) - Royal Dutch Shell (RDSa.L: Quote) sought to ease investor concerns over its planned $70 billion takeover of BG Group BG.L on Tuesday, announcing further benefits and cost cuts aimed at making the deal work with an oil price in the mid-$60s a barrel.

The Anglo-Dutch group, which hopes to complete the deal early next year, said it now expected savings to increase by $1 billion to $3.5 billion for the combination which will make Shell a leader in liquefied natural gas (LNG) and offshore oil production in Brazil.

Shell, which last week reported a huge third-quarter loss due to $8 billion of write-offs in Alaska and Canada, said it would cut costs by $11 billion in 2015 to cope with a prolonged period of lower oil prices, currently trading below $50 per barrel.

"Although oil prices have fallen in 2015 the valuation case for the BG acquisition still looks compelling today for both sets of shareholders," Shell Chief Executive Ben van Beurden told reporters.

Investors have been concerned that the deal would be at risk as a recovery in oil prices is now expected to take much longer than predicted in April, when the BG transaction was announced.

Back then, Shell indicated it expected oil prices to recover to $90 a barrel by 2020.

Brent crude LCOc1 was around $59 per barrel when the deal was announced and has since traded between about $42 and $69 amid a growing consensus among analysts that prices are set to stay "lower for longer."

"The benefits (of the acquisition) come from delivery of growth projects which will deliver cash flows not over 6 months or 12 months, but over 15-20 years, that's the real value," Shell Chief Financial Officer Simon Henry told investors.   Continued...

Shell branding is seen at a petrol station in west London, January 29, 2015.  REUTERS/Toby Melville