Business Context and Reporting Period
Company: Royal Dutch Shell plc (Shell)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Date: April 8, 2015
Event: Announcement of a recommended cash and share offer to acquire the entire issued and to be issued share capital of BG Group plc (BG). The transaction is structured as a court-sanctioned scheme of arrangement, subject to regulatory approvals and shareholder votes.
Key Financial Metrics and Offer Terms
Offer Consideration per BG Share:
- Cash Component: 383 pence
- Share Component: 0.4454 Shell B Shares (or Shell A Shares under specific circumstances)
Total Value of Offer:
- Aggregate Value: Approximately £47.0 billion for BG's entire share capital.
- Value per Share: Approximately 1,350 pence (based on 90-day VWAP) or 1,367 pence (based on closing price) per BG Share.
- Premium: Approximately 52% over the 90-day volume-weighted average price and 50% over the closing price of BG shares on April 7, 2015.
Pro-Forma Impact (2014 Basis):
- Reserves: Adds approximately 25% to Shell's proved oil and gas reserves (totaling ~17 billion boe).
- Production: Adds approximately 20% to production (totaling ~3.7 million boepd).
- Ownership: BG shareholders will own approximately 19% of the Combined Group.
- Gearing: Pro-forma balance sheet gearing estimated at approximately 20%.
Material Changes and Strategic Rationale
The acquisition represents a strategic shift to accelerate Shell's growth in global Liquefied Natural Gas (LNG) and deep water sectors.
- LNG Capacity: Equity LNG capacity expected to rise from 26 mtpa (2014) to 45 mtpa by 2018.
- Brazil Deep Water: Production in Brazil expected to increase from 52,000 boepd (2014) to an estimated 550,000 boepd by the end of the decade.
- Portfolio Restructuring: Shell expects to increase asset sales to $30 billion for the period 2016–2018 to fund debt reduction and optimize the portfolio.
- Capital Investment: Organic capital investment expected to drop below $40 billion in 2016.
Guidance, Outlook, and Management Commentary
Financial Outlook:
- Earnings Per Share (EPS): Expected to be mildly accretive in 2017 and strongly accretive from 2018 onwards (excluding identified items).
- Cash Flow: Expected to be accretive to cash flow from operations per share from 2016.
- Return on Capital Employed (ROACE): Expected to be neutral from 2018, with potential for growth thereafter, assuming flat oil prices.
- Dividends: Shell confirms an intention to pay dividends of $1.88 per ordinary share in 2015 and at least that amount in 2016.
- Share Buybacks: Subject to debt reduction and oil price recovery, Shell expects to commence a share buyback program in 2017 of at least $25 billion for the period 2017–2020.
Synergies:
- Target: Pre-tax synergies of approximately $2.5 billion per annum by 2018.
- Breakdown: $1 billion in operating cost savings and $1.5 billion in reduced exploration expenditure.
- Implementation Costs: Estimated one-off costs of approximately $980 million incurred over the first three years post-completion.
Management Commentary: Shell Chairman Jorma Ollila and CEO Ben van Beurden stated the combination creates a more competitive, stronger company, accelerating the delivery of strategy in a volatile oil price environment. BG Chairman Andrew Gould and CEO Helge Lund noted the offer provides an attractive premium and accelerates value delivery.
Risks and Contingencies
- Regulatory Approvals: The deal is subject to pre-conditions including antitrust clearances in the EU, Brazil, China, and Australia, as well as foreign investment approval in Australia.
- Shareholder Approval: Requires approval from BG shareholders (75% by value) and Shell shareholders (Class 1 transaction).
- Market Conditions: Financial projections assume Brent oil prices recovering to the middle of Shell's long-term planning range ($70-$90-$110 per barrel). Actual results may differ materially if oil prices remain low.
- Integration Risks: Synergies may not be achieved, or may be achieved later than estimated. One-off implementation costs are expected.
- Accounting Impact: The combination will result in an annual non-cash post-tax charge to the profit and loss account of approximately $2 billion due to a step-up in depreciation charges.
Key Facts for Investor Verification
- Verify the status of regulatory approvals, specifically in Brazil (CADE) and Australia (ACCC/Treasurer), which are critical pre-conditions.
- Monitor the progress of debt reduction, as the $25 billion buyback program is contingent upon this and oil price recovery.
- Assess the impact of the $2 billion annual non-cash depreciation charge on reported earnings post-completion.
- Track the execution of the $30 billion asset sale program planned for 2016–2018 to ensure capital discipline.
- Confirm the final implementation method (Scheme of Arrangement vs. Takeover Offer), as this affects the share class (A vs. B) issued to BG shareholders.