Shell agrees $70bn takeover deal for BG: Update 3

Adds share price detail in paragraphs 9 and 10, and van Beurden comments on oil prices in paragraphs 17 and 18

Shell has reached a deal to buy UK-listed BG for £47bn ($70bn).

The two companies made the announcement to the London Stock Exchange earlier today. Shell said the takeover will add 25pc to its proven oil and gas reserves and 20pc to its production, both on a 2014 basis.

"We have been looking at BG for a long time. We have admired the company for a long time," Shell chief executive Ben van Beurden said today. "We felt this was the right time to move."

Under Shell's recommended cash and share offer, BG shareholders will receive 383p in cash and 0.4454 Shell B shares for each share in BG. The deal will leave BG shareholders owning about 19pc of the combined group. The cash portion of the deal amounts to £13.2bn ($19.6bn).

The deal will enhance Shell's oil production through access to BG's deepwater Brazilian assets and its LNG output through its Australian assets. The addition of upstream assets to an enlarged Shell will answer worries it has allowed its reserve replacement ratio to drop.

The combined group would have proven reserves of some 16.7bn bl of oil equivalent. BG's total production was 630,000 b/d of oil equivalent (boe/d) in the fourth quarter 2014, a fall of 1pc from a year earlier. Shell's fourth-quarter production also fell by 1pc on-year, to 3.21mn boe/d.

The deal "will accelerate Shell's financial growth strategy, particularly in deep water and liquefied natural gas: two of Shell's growth priorities and areas where the company is already one of the industry leaders", van Beurden said. "We will be concentrating on fewer themes, and at a larger scale, to drive profitability and balance risk, and unlock more value from the combined portfolios."

"The offer from Shell delivers attractive returns to shareholders and has strong strategic logic," BG's new chief executive Helge Lund said. "BG's deep water positions and strengths in exploration, liquefaction and LNG shipping and marketing will combine well with Shell's scale, development expertise and financial strength. The consolidated business will be strongly placed to develop the growth projects in BG's portfolio. The transaction will take time to complete, during which my team and I will remain committed to BG and our shareholders, and to safely delivering our 2015 business plan."

BG's shares rose by 27pc today, after opening 43pc higher than the close of trading yesterday. Shell's shares fell by more than 5pc.

Shell's offer represents a 50pc premium to BG's share price prior to the deal announcement. Van Beurden defended the premium, calling it "quite acceptable and normal". He said that even after paying the premium, there is a significant amount of value left for Shell's shareholders "to enjoy going forward".

The fall in oil prices since the middle of last year prompted many analysts to speculate on the prospect of consolidation in the industry, with cash-rich companies tipped to take advantage of smaller rivals with weaker balance sheets. But large corporate takeovers on this scale have, until now, not materialised.

Shell's aggressive divestment programme last year left it with a large war chest. The firm sold $15bn of assets, including $1bn from spinning off US pipeline assets into a master limited partnership. This left the company with $21.6bn of cash on hand at the end of last year.

BG, on the other hand, has endured two years of setbacks. Chris Finlayson resigned as chief executive in April last year after failing to arrest a run of production forecast downgrades. Political instability in Egypt and the glut of US shale gas triggered heavy impairments. And the firm's weakening share price left it increasingly vulnerable. The appointment of Helge Lund from Norway's state-controlled Statoil showed BG was serious about turning its fortunes around. But Shell's offer has proved too good to turn down.

Such a large deal is likely to attract the attention of regulators, and Shell said it expects scrutiny in Australia, Brazil, China and the EU. The latter is most likely because both companies are based in the region, rather than for any market position issues, Shell said.

"We have not identified major issues, but there are not many precedents for a transaction of this scale either… That is why we talk about maybe 12 months or so, early 2016 for closure," Shell chief financial officer Simon Henry said.

Shell said the enlarged company's deepwater and integrated gas operations alone could generate $15bn-20bn a year of operating cash flow each by 2020. Its mature upstream and downstream operations could generate a further $15bn-20bn a year combined. And its "long-term positions" could add a further $10bn a year. This all assumes Brent crude returning to around $90/bl.

Van Beurden said the proposed merger is "not a bet on the oil price" and "makes sense in all scenarios that you can envisage".

"We are not relying on a certain recovery pattern for the logic of the deal. The deal makes sense at a whole range of oil prices. And if for whatever reason we have got it completely wrong and we are looking at oil prices in perpetuity of the levels we are seeing today, the industry will have to reset its cost base, otherwise it is just not going to work. And even in that scenario it still will make sense," he said.

Combined organic capital investment of $42bn-43bn is planned for 2015, with Shell's share at a maximum $35bn. Combined capex for 2016 is expected to come in at below $40bn, with a further cut planned in 2017.

Shell expects the combination of the two companies to be strongly accretive to profit per share from 2018 onwards, excluding one-off items. The takeover would have reduced Shell's return on average capital employed (Roace) by around 1.5pc, on a 2014 pro-forma basis, but Shell expects the effect on Roace to be neutral from 2018.

Shell plans to supplement its cash flow with divestments. It has set new target today to sell $30bn of assets in 2016-18.

The firm plans to pay down debt from 2016 to maintain a strong balance sheet and expects to buy back at least $25bn of its shares in 2017-20 to help reduce the equity issued in connection with the takeover.

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