Business Context and Reporting Period
This Form 6-K, dated December 22, 2015, serves as a Circular to Shell shareholders regarding the recommended cash and share offer by Royal Dutch Shell plc (Shell) for BG Group plc (BG). The transaction is structured as a court-sanctioned scheme of arrangement, with an expected effective date of February 15, 2016. The filing details the terms of the combination, the strategic rationale, and the financial implications for the Combined Group.
Key Financial Metrics
Transaction Terms
- Consideration: BG shareholders receive 383 pence in cash and 0.4454 Shell B Shares per BG Share.
- Total Value: Approximately £35.6 billion (approx. $55 billion at prevailing rates), representing a ~50% premium to BG's closing price on April 7, 2015.
- Ownership Structure: Post-combination, existing Shell shareholders will own approximately 81% of the Combined Group, while former BG shareholders will own approximately 19%.
- Share Issuance: Up to 1,526,494,336 New Shell Shares will be issued.
Historical Performance (Shell Group)
- Revenue (9M 2015): $206.8 billion (down from $328.7 billion in 9M 2014).
- Income Attributable to Shareholders (9M 2015): $1.0 billion (down from $14.3 billion in 9M 2014).
- Upstream Earnings (9M 2015): Loss of $5.3 billion (compared to $13.2 billion profit in 9M 2014), driven by lower oil prices and impairments.
- Downstream Earnings (9M 2015): $7.7 billion (up from $1.9 billion in 9M 2014), benefiting from higher refining margins.
- Net Cash from Operations (9M 2015): $24.4 billion.
- Gearing (3Q 2015): 12.7%.
Historical Performance (BG Group)
- Revenue (9M 2015): $12.0 billion (down 20% from 9M 2014).
- Profit Attributable to Shareholders (9M 2015): $2.4 billion (down 59% from 9M 2014).
- EBITDA (9M 2015): $4.2 billion (down 43% from 9M 2014).
- Production (9M 2015): 686 kboepd (up 15% from 9M 2014).
Pro Forma Financial Information (Combined Group)
- Pro Forma Profit Before Tax (FY 2014): $25.3 billion.
- Pro Forma Net Assets (as of Sept 30, 2015): $194.9 billion.
Material Changes and Strategic Outlook
The filing highlights a significant strategic shift driven by the acquisition of BG, aimed at reshaping Shell into a more focused entity centered on three pillars: upstream/downstream cash engines, deep water, and LNG. Key material changes and outlooks include:
- Reserves and Production: The combination adds approximately 25% to Shell's proved oil and gas reserves (to ~17 billion boe) and 20% to production (to 3.7 million boepd).
- Capital Expenditure: Shell expects to reduce capital investment to approximately $33 billion in 2016 (down from $35 billion previous guidance and significantly lower than the combined 2014 baseline of $47 billion).
- Asset Sales: A program of asset sales totaling approximately $30 billion is planned for 2016–2018 to simplify the portfolio.
- Cost Reduction: Shell targets a $7 billion reduction in operating costs over 2015 and 2016. The combination is expected to generate pre-tax synergies of $3.5 billion by 2018 ($2.0 billion in operating cost savings and $1.5 billion in exploration expenditure reductions).
- Dividend Policy: Shell confirms its intention to pay a dividend of $1.88 per share in 2015 and at least that amount in 2016.
- Share Buybacks: Subject to debt reduction and oil price recovery, Shell plans to withdraw the Scrip Dividend Programme in 2017 and initiate a share buyback program of at least $25 billion between 2017 and 2020.
Risks, Contingencies, and Management Commentary
Management Commentary
Management views the combination as a compelling opportunity to accelerate LNG and deep water strategies, enhance free cash flow, and improve the oil price breakeven to the low $60s (Brent). The transaction is expected to be accretive to cash flow from operations per share and free cash flow per share in 2016 assuming Brent oil prices of $50 or higher.
Risks and Contingencies
- Completion Conditions: The scheme is subject to regulatory approvals (including antitrust and foreign investment), shareholder approval at Shell and BG meetings, and court sanction. Failure to satisfy these conditions could delay or prevent completion.
- Commodity Price Volatility: The Combined Group remains highly exposed to fluctuations in crude oil, natural gas, and chemical prices. Low prices impact upstream earnings and cash flow significantly.
- Integration Risks: Success depends on the ability to integrate operations, realize synergies, and execute the disposal program without disruption. Unanticipated liabilities or costs could arise.
- Reserves Estimation: Differences between SEC Rules (used by Shell) and PRMS (used by BG) may lead to downward adjustments in proved reserves estimates upon re-estimation.
- Political and Legal Risks: Operations in jurisdictions with political instability (e.g., Brazil, Nigeria, Kazakhstan) expose the group to risks of expropriation, contract renegotiation, and litigation.
- Break Fee: Shell has agreed to pay BG a break fee of £750 million if the combination fails to complete due to specific events, such as Shell withdrawing its recommendation or regulatory conditions not being met.
Key Facts for Investor Verification
- Shareholder Approval: Verify the outcome of the Shell General Meeting scheduled for January 27, 2016, and the BG Court Meeting on January 28, 2016.
- Regulatory Clearances: Confirm the receipt of all remaining regulatory consents (specifically Tanzania and Uruguay) prior to the Shell General Meeting.
- Oil Price Sensitivity: Assess the impact of current and projected Brent oil prices on the accretion claims (breakeven in low $60s; accretion at $50+).
- Debt Reduction Progress: Monitor Shell's ability to reduce debt from 2016 onwards to support the planned share buyback program and dividend maintenance.
- Asset Sale Execution: Track the progress of the $30 billion asset sale program planned for 2016–2018 to ensure portfolio simplification targets are met.
- Reserves Re-estimation: Review the final re-estimation of BG's reserves under SEC rules post-completion to understand the actual reserve life of the Combined Group.