Shell in ‘Advanced Talks’ to Buy BG Group

Teekay's Petrojarl Knarr FPSO, which is on charter to BG Group. Photo: BG Group
Teekay’s Petrojarl Knarr FPSO, which is on charter to BG Group. Photo: BG Group

By Joe Carroll, Bradley Olson and Javier Blas

(Bloomberg) — Royal Dutch Shell Plc is in talks to acquire BG Group Plc in a deal that would vault Shell to the top of the global gas-export industry and gather together untapped discoveries from Brazil to East Africa.

Shell, struggling to rebound from its worst production performance in 17 years, would swell its oil and gas reserves by 28 percent by absorbing BG and inherit a management team that has racked up a string of wildcat discoveries, positioning itself as a key player in international liquefied natural gas, or LNG.

BG confirmed in a statement on Tuesday that it’s in “advanced discussions” with Shell and that there is no certainty an offer will ultimately be forthcoming. The deal, which envisions combining Europe’s largest oil explorer by market value with the No. 3 U.K.-based energy producer, would be the industry’s biggest in at least a decade, according to data compiled by Bloomberg.

“This is a very big deal,” said Stephen Simko, an energy- industry analyst at Morningstar Inc. in Chicago. “We don’t know what kind of premium Shell is willing to pay but BG has been undervalued for a long time.”

BG, for its part, has been a victim of both its own success and $50-a-barrel oil. The Berkshire, U.K.-based company’s balance sheet has been stretched as the relatively cheap task of finding new fields evolved into the costly business of developing those fields into active sources of crude and gas.

LNG & Oil

Shell would acquire not only BG’s extensive network of LNG terminals and tankers but also a string of diverse discoveries from Brazil to Australia to Mozambique.

In LNG, “people want to have holdings all over the world and this is a big way to do it,” said Jim Krane, an energy fellow at Rice University’s Baker Institute for Public Policy in Houston.

A Shell representative declined to comment on the talks, which were earlier reported by the Wall Street Journal. Buying BG would be Shell’s largest acquisition since the 40.7 billion- pound ($60.3 billion) merger of its Dutch and U.K. parent companies in 2005, according to data compiled by Bloomberg.

Shell, which invented the oil tanker in the 1890s to haul Caspian Sea crude to European markets, saw its worldwide production drop to the equivalent of 3.08 million barrels a day in 2014, the lowest in at least 17 years. Reserves, a metric that investors watch to assess future growth prospects, have declined in two of the past three years.

BG Reserves

In contrast, BG boosted reserves in six of the past seven years. Its reserves were 78 percent gas as of Dec. 31, compared with 47 percent for Shell.

BG was forged from the exploration arm of the U.K.’s former state-owned gas monopoly, British Gas, that was privatized by Margaret Thatcher in the 1980s.

The company was led for more than a decade by Frank Chapman, who built a global LNG business and drilled wells from Kazakhstan to Brazil. The company’s market value rose more than fivefold during his tenure, outperforming larger rivals including Shell and BP Plc.

Chapman retired at the end of 2012 and his successor Chris Finlayson lasted little more than a year, resigning in early 2014 after profit warnings and disagreements with the board over strategy. He was replace by Helge Lund, poached from Norway’s state oil producer Statoil ASA, who BG made the most highly paid oil executive in Europe to win his services. He now seems set to negotiate the sale just two months after taking the helm.

Record Loss

BG posted a record $5 billion loss in the fourth quarter, mainly due to writing down the value of its Australian assets as commodity prices fell.

BG last month told investors it expected global LNG demand to grow at 5.1 percent per year from 2014 to 2025, with current supply and planned additions insufficient to meet anticipated demand from the early 2020s onwards.

–With assistance from Aaron Kirchfeld in London.

©2015 Bloomberg News