BG - Shelling out the cash (and shares)

BG: Well, new CEO Helge Lund hasn’t hung about, no setting out his desk pens all neatly and organizing the redecoration of his office. Here we have an agreed offer from Royal Dutch Shell, comprising 0.4454 of a new Royal Dutch Shell ‘B’ share and 383p in cash per BG share. On the 90-day average RDSB price of 2170.3p, that is 1350p per BG share, a 52% premium. These terms will give BG holders some 19% of the enlarged group. As well as any industrial logic (such as using RDSB cash to accelerate/improve LNG and Brazil pre-salt returns), BG shareholders will get the benefit of $1.88 of RDSB dividends in FY2015 and FY2016, for a 5% plus yield against some 1.5% off BG (which has less robust cash flow). The deal is expected to be eps accretive in 2017, accelerating into 2018, with better cash flow underpinning those dividend prospects.

However, all this is at a time of low oil prices, which is making life look a lot tougher for BG. Corruption scandals at Brazilian pre-salt partner Petrobras haven’t helped either. Roll back a few years and most analysts would have valued BG at nearer £20, before weakening energy prices and a run of poor production numbers kicked in. Five years ago, in early 2011, the shares were almost £16. With RDSB down sharply today, we have BG trading at 1250p, miles from that £20 mark. With a third of the consideration being in cash and only a 19% chunk of the enlarged group, BG holders are being asked to give up on ever achieving that £20 ambition, which is a rather bitter pill. Given that Lund has only just arrived, perhaps his immediate conclusion is that he thinks this is really the best way forward. Maybe though, holders would have preferred him to work some Statoil magic and wait for an energy price recovery. The other possibility is that a major asset such as BG attracts rival suitors, helping to bridge the gap between those 1250p/1350p numbers and the £20 ambition. Either way, for now BG holders might as well sit tight and see what happens next.  (Neil Cumming^, 8^th April 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower