Shell begins M&A race with move for BG

Industry experts believe we may well be looking at a period of major mergers and acquisitions in the sector.

The merger will make the new entity the second largest energy company in the world, with the transaction giving the company a market cap of £170 billion (€234.5 billion).

 “It is going to be one huge energy company. It’s clear that this deal makes sense for everybody,” according to one industry source.

The deal amounts to the fourth largest transaction in the sector since 1996, an era that saw a raft of similar mergers in response to shrinking profits. Oil prices have plummeted by more than 50%  since last July, as supply increases wreaked havoc on markets.

“There are a number of good assets out there that have been getting into difficulty because of the way the market is. That doesn’t change the fact that they are good operations and are attractive to other companies such as Shell,” the source added.

Earlier this year, Spanish oil giant Repsol purchased Talisman in an €8.3 billion acquisition, a deal dwarfed by Shell’s impending purchase.

From a wider perspective, the source claims the industry will be closely watching how the deal unfolds on an operational basis: “What is obvious is that there is a clear shift in strategy here from Shell. They are going hell for leather into LNG. Obviously when a company of that size makes such a huge strategic decision, the rest of that sector is going to want to see how it develops.”

Analysts at Bankinter think Shell have acted at an opportune moment:

“This type of consolidation is typical in times of falling oil prices. Shell will compliment its LNG division by accessing BG’s fields in Brazil, Africa, Australia and Egypt. In addition, it will boost its reserves by 25% and its production rate by 20%.  Effectively, it will increase its reserves without the risk of exploration,” they said in a note sent to The Corner.