Wood Mackenzie: Shell’s acquisition of BG secures industry leading positions in deepwater oil and LNG

woodmac-logo-webSince the deal was announced in April, oil prices have near halved and Shell’s share price has fallen 35%. The strategic drivers for the acquisition remain compelling despite deepening turmoil across the oil and gas sector.

“First mover advantage secures Shell industry leading positions in deepwater oil and LNG,” says Tom Ellacott, Senior Vice President of corporate analysis for Wood Mackenzie, reacting to the Shell BG deal.

The deal values BG’s equity at US$54 billion, plus net debt of US$9 billion. An effective date of 15 February is planned. Shell will now join ExxonMobil in the Ultramajor league, but there will be clear differentiation at the top with ExxonMobil having leadership in unconventionals, and Shell in LNG and deepwater.

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A real prize for Shell is the oil in deepwater Brazil

By 2025 Brazil will be delivering 610 thousand barrels of oil equivalent per day; 13% of BG/Shell’s total production and the biggest single country position in the combined portfolio. Breakeven prices for the main assets rank alongside the best tight oil plays. Deepwater leadership will be firmly established, with Shell having 65% more value locked up in the deepwater sector than second placed peer BP once the deal closes.

An LNG behemoth emerges

The combined entity will control sales of 53 million metric tonne per annum of LNG by 2020, making it the largest LNG seller globally. Shell will have unrivalled flexibility and exposure to virtually every major LNG supply source and market, providing significant scope for portfolio optimisation. The move re-energises Shell’s LNG development pipeline, adding a leading US position, entry to East Africa, and new options to expand in Australia and Canada.

What does this mean for the LNG market?

Combining the LNG portfolios will bring scale and optionality. This will offer advantages as the LNG market becomes more open and global, including a greater capacity to offer portfolio supply.

“Fundamentally we still have it as a growth market, but we’ve gotten more bearish about LNG demand,”. On the other hand, “the prospect of a rebound in a rising oil price environment is pretty strong”, Giles Farrer, Research Director of Global Gas and LNG Corporate Service, said to the Wall Street Journal about the outlook for the LNG market.

The economics still stack up

Oil prices have dropped significantly since the initial announcement of the deal and Shell’s share price has fallen 35%. The effective purchase price has dropped to almost 25% to US$63 billion (as at 26 January, including latest debt of US$9 billion), equating to an Implied Long-term oil price of US$70/bbl under our latest modelling in the Global Economic Model.

What’s next for the company?

Shell has outlined a post-BG strategy of ‘grow to simplify’, but it will not be plain sailing and a ‘lower for longer’ oil price scenario has added to the challenges Shell faces. We’ve identified 6 key success factors to achieving value growth, despite ongoing oil price volatility:

  1. Maximising cost synergies, notably in LNG and exploration
  2. Executing portfolio restructuring, most likely weighted towards downstream and midstream sales
  3. Defending LNG leadership with new sources of supply and demand
  4. Maintaining momentum in Brazil as Petrobras slashes investment
  5. Next steps in business development, particularly in tight oil
  6. Delivering on shareholder returns, with dividends, buybacks and value growth

(Source: Wood Mackenzie)

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