Shell says BG deal will produce ‘billions’ in savings
Royal Dutch Shell expects billions in savings from its proposed £55bn takeover of BG Group as it uses the enlarged company’s scale to slash costs in its deepwater oil business and natural gas trading arm.
Stung by a slide in Shell’s share price, which has tumbled 13 per cent since the BG deal was announced in early April, chief financial officer Simon Henry has sought to turn round investor scepticism over the economics of the deal.
The Anglo-Dutch energy company has told investors and analysts that so-called “value synergies” — benefits that cannot yet be quantified under City takeover rules — are likely to be “a multiple” of the $1bn in annual projected savings from merging head offices and other cost-cutting.
Ben van Beurden, Shell’s chief executive, is also likely to use the company’s interim results on July 30 to outline a substantial cut to this year’s capital investment, as it adjusts to a 50 per cent plunge in oil prices since last summer.
Few in the City have questioned the deal’s logic, which gives Shell huge deepwater Brazilian reserves and cements its position as the world’s biggest supplier of liquefied natural gas after Qatar.
But concerns have grown that Shell needs oil prices of $90 a barrel for the deal to work, its projected savings are too low and new LNG supplies will send Asian prices even lower.
In what one person present called an “impassioned” speech over a lunch with about 40 investors and analysts at Wimbledon on men’s quarter-finals day, Mr Henry insisted that the deal worked at $70 a barrel. The chief financial officer said it would add immediately to cash flow and the dividend would be maintained.
Another person said: “There is a frustration in Shell that people are not understanding the oil price that this deal works at and that the reason it works at that lower oil price is there are much greater synergies.”
A third person present at the speech said: “This was a tacit admission that they had underestimated, or missed, the importance of selling it hard to investors.”
Several analysts seized on Mr Henry’s remarks that “value” synergies were likely to be a multiple of initial operational cost savings of $1bn.
They suggested that the enlarged group’s Brazilian deepwater oil portfolio and its combined LNG trading and marketing operations would lead to economies of scale. These would include reduced procurement and supplier costs in Brazil and, in the trading arm, savings on shipping and logistics.
Under takeover rules, Shell can only set out initial cost reductions from eliminating clear duplication in areas which accountants are able to verify, such as headquarters, IT and human resources.
Irene Himona, energy analyst at Société Générale, said she expected the company to announce value synergies “amounting to a potential ‘high multiple’ of the original $1bn”, and as much as $5bn, on the deal’s completion.
Shell’s shares have in the past year underperformed those of a group of “supermajors” including BP, whose share price rose after it announced steep spending cuts.
This year’s capital spending budget at Shell is expected to be revised lower, by several billion dollars from the $33bn announced at the end of April, reflecting project deferrals.