Royal Dutch Shell is so determined to close the gap on U.S. Exxon Mobil – the market leader in the energy industry sector – that they are willing to spend more than it is worth, according to market experts. Shell bought smaller rival company BG Group in a $70 billion transaction, in what is thought to be the biggest merger signed in the energy industry in the past ten years.
Buying BG is the third biggest deal ever in the industry and is expected to bring Shell more options in the liquefied natural gas sector, where BG capitalized on the growing demand by coming up with some innovative projects. Shell was already the biggest LNG company in the world, but getting access to BG infrastructure would allow them to enter markets like Brazil, Kazakhstan or Australia.
According to some market specialists, however, the merger might not prove as profitable as Shell hopes to. “Shell is still taking a big gamble because if the price of oil and gas doesn’t go back up, I would imagine this might put them in a difficult position in terms of cash flow,” JBC Energy Asia director Richard Gorry believes.
Shell, the largest energy company in Europe, announced on Wednesday that they expect to see a 25 percent increase in the company’s oil and gas reserves as a result of the BG acquisition. What Shell executives are actually doing is betting that the role of alternative energy sources, such as LNG-based energy will mark a significant increase at least in emerging economies, and when so their company will be the first to reap the benefits.
But many of Shell’s investors expressed serious concerns over the short term costs of the $70 billion transaction, suggesting that it might take a while until profits will start flowing, and in the meantime the company will still have to sustain its costly dividend policy. “There is no danger that Shell will change its dividend policy,” Michael Clark, Fidelity MoneyBuilder Dividend Fund specialist, reassured Shell shareholders.
According to Shell Chief Financial Officer Simon Henry, the merger between Shell and BG will create a LNG giant estimated to sell 50 million tons over the next five years, twice as much as its rival Exxon. As a result of acquiring BG, Shell will now become the leading foreign oil company in a very important emerging market – Brazil. But the executives will have to convince the investors that BG’s portfolio is profitable beyond Brazil and take a large share of the LNG markets in Australia, China and the European Union.
Shell-BG will account together for about 18 percent of the world’s LNG yearly output, and those behind the creation of the group hope it will get the attention of new, richer investors. “A deal of this size would certainly be getting everyone interested in running the ruler over potential combinations in the natural resources sector,” energy market analyst Paul Gait believes.
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