Wood Mackenzie believes that Shell’s move to buy BG is a compelling first move on the M&A market, which will secure its industry leading positions in deepwater oil and LNG.
The deal, which is expected to completed in early 2016, values BG's equity at US$70 billion, plus net debt of US$12 billion.
Tom Ellacott, Vice President of Corporate Analysis for Wood Mackenzie, believes that the deal will result in the emergence of an LNG behemoth. The combined entity will become the largest LNG seller globally by 2018, when it will control sales of 44 million tpy of LNG. Ellacott explains: “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.”
Wood Mackenzie also believes that the oil in deepwater Brazil will be a significant prize for Shell. Brazil is expected to deliver 550 000 bbl/d of oil by 2025, and Wood Mackenzie notes that Shell will have 50% more value locked up in the deepwater sector than BP once the deal closes.
Mr Ellacot holds that, post-BG, Shell will remain under-exposed to unconventionals relative to its peers. In addition, exploration spend will be cut to replicate the high-grading success of previous mega-mergers and free cash flow growth will be allocated to US$25 billion of share buybacks by end-of 2020.
Ellacott said: “This may be the catalyst for a new phase in upstream corporate M&A, and the spotlight will shift to how other majors – and particularly ExxonMobil – respond.”
Wood Mackenzie believes that Shell may now surpass ExxonMobil as the largest IOC producer in the early 2020s. However, clear differentiation could emerge at the top with ExxonMobil leading in unconventionals, and Shell in LNG and deepwater.
Edited from press release by Callum O'Reilly