The board of oil giant Shell has today unanimously recommended the £35.6 billion merger with hitherto rival BG to its shareholders.
And the prospectus for the merger – in which BG shareholders will receive 383p in cash for each share, plus just under half (0.445) of a Shell B-share – also contains a ‘road map’ which Shell will follow to escape from the current financial quagmire of a sub-$40-barrel-oil economy.
And over the next two years (2016-2018) Shell plans to use the merger with BG as a ‘springboard to re-shape Shell’ with planned sales of $30 billion of asssets, leaving the combined Shell-BG group focussed around ‘three pillars’: –
- Upstream and downstream oil ‘cash engines’
- Deep water exploration
- and LNG
Shell also confirmed its plans to shed a further 2,800 oil contractor jobs on completion of the merger – in addition to the 7,500 job losses (in Scotland and globally) earlier this year.
Shell slashed investment (capital expenditure) by 20% this year compared to 2014 – down $8 billion to $29 billion.
While – in 2016, Shell plans to raise capital spending to $33 billion, it confirmed that will be $2 billion lower than previously stated and this figure will still be 30% lower than the combined Shell-BG investment in 2014.
Shell’s operating costs are expected to fall by $4 billion in 2015, a reduction of around 10% from 2014 levels of $45 billion. Shell’s costs should be reduced by a further $3 billion in 2016, marking a reduction of $7 billion in 2015 and 2016 combined, or 15% from a 2014 baseline. These figures exclude cost synergies potential from the merger with BG.
Chad Holliday, Chairman of Shell, said: “This is an important moment the company, but the board is unanimous in its recommendation on this transaction.
“Our industry has entered what could be a prolonged oil price downturn.
The Board is confident that the financials of the group will be further strengthened by this transaction. This should improve Shell’s ability to cover both dividends and investments.
“The result will be a more competitive and stronger company, for both sets of shareholders, in today’s volatile oil price world.”
Chief Executive Ben van Beurden added: “The combination with BG represents a tremendous opportunity to create value for both sets of shareholders, particularly in deep water and LNG. The combination with BG is a strong platform to refocus the company, to create a simpler and more competitive Shell.
“At the same time, we are pulling multiple levers to manage through the current oil price downturn. We have delivered in 2015, maintaining a strong balance sheet, and achieving some $12 billion of cost and capital spending reductions.
“We aim to reduce costs and capital spending once again in 2016, as we combine Shell with BG, and continue to take impactful decisions on portfolio and options. This is to ensure that Shell can continue to finance the investment programme and the dividend, despite the downturn.
“As the end-2015 fall in oil prices underscores that the current oil price downturn could last for several years.
The net asset-value (NAV) crude oil price break-even for the Shell-BG merger is estimated to be in the low $60s Brent oil prices, taking account of the transaction structure, current equity market conditions, reduced operating cost forecasts and capital expenditure over time, together with other factors, including synergies.
Assuming $50-barrel Brent oil prices or higher, Shell expects the combination group to be cash flow accretive from operations per share in 2016. A spokesman added:
“This underlines the benefits of the transaction for shareholders, particularly in the current oil market downturn, as it structurally reduces the oil price break-even of Shell.”