When energy prices began to crater last October, plenty of analysts began to talk about the upcoming wave of M&A and buyout activity.
Well, the latest move from integrated giant Royal Dutch Shell plc (ADR) (NYSE:RDS.A, NYSE:RDS.B) sort of throws that idea of big buying small out the window. Shell is opening its wallet in a big, big, big way.
The energy firm has agreed to buy out one of the largest natural gas focused producers in the world for a hefty sum. The deal makes RDS a natural gas kingpin and puts the pressure on its integrated rivals to make similar big moves.
For investors, it could be the spark needed to move Shell’s struggling shares higher, as well as reignite energy stocks in general.
A Whopping $70 Billion Dollars
While BG Group plc (ADR) (OTCMKTS:BRGYY) may not be familiar to most U.S. investors, the firm is a giant in the energy industry, with a market cap of $58 billion. BG has assets spanning the globe, including holdings in Brazil, Africa, Australia, Kazakhstan and Egypt.
The “BG” stands for “British Gas,” which means many of those assets are focused on the natural gas segment of the market. Those rich natural gas assets are exactly what Shell needed and wanted.
To that end, RDS has opened up its wallet and offered just under $70 billion in cash and stock to BG in an ambitious buyout offer — one that marks the first major energy deal in decades. The last time a deal even came close to this size was when Exxon Mobil Corporation (NYSE:XOM) ponied up $35 billion for XTO.
By why exactly would Royal Dutch Shell be willing to offer a nearly 42% premium for BG? Easy: liquefied natural gas (LNG).
Shell Widens Its LNG Lead
Shell is already the leading producer of LNG in the world and actually developed the technology for the world’s first commercial LNG plant more than 50 years ago.
Under former CEO Peter Voser, Shell added to that history by investing more than $30 billion in various LNG projects and facilities. That figure includes gasification plants in Canada and Malaysia, a huge stake in Australia’s Gorgon field and construction on the first-of-its-kind floating LNG plant.
So RDS is certainly serious about natural gas’s future as the dominant fuel source for generating electricity and power needs for the world.
In the world of LNG, BG is no slouch, either. Using a slightly different business model than traditional LNG players, BG has become as much of a logistics play on the fuel source as it has on its production. Basically, BG has all the required complex infrastructure needed to produce, ship and use LNG from the well head to the generator. It handles everything from terminals & pipelines to specialized tankers and regasification facilities.
The Shell/BG portfolio fits together perfectly. In many instances, the assets are basically near each other. After buying BG, Shell now has holdings across the entire LNG value chain, not just the production and shipping side. All in all, the new Shell/BG combo would control about 18% of the world’s LNG market and be the dominant force in the sector.
That dominating force will see instant cost savings and synergies of about $2.5 billion per year and produce cash flows of $15 billion to $20 billion by 2020 as LNG takes off.
RDS Is Now The Leading Energy Stock
At the end of the day, the buy should help Shell overtake XOM has the world’s largest energy stock by 2018, according to analyst projections. Buying BG is expensive, but it was necessary to keep Shell’s growth going. Ultimately, it should help move RDS.A shares higher over the long term.
Shell stock has been suffering under the weight of too many ambitious — read: poorly executed — projects. However, the BG buy is basically a drop-in and should help expand the firm’s dominance in an already great market sector.
For investors, that makes RDS stock a big buy for the long term.
That is … until XOM, Chevron Corporation (NYSE:CVX) and other major players begin opening their wallets. The Shell/BG deal harkens back to the late 1990s when the super majors first began joining forces. It’s almost given that XOM and the like will begin another round of mega-M&A — especially since oil and natural gas prices are down in the dumps.
And with $70 billion being tossed around as a starting point, almost any large energy stock — Anadarko Petroleum Corporation (NYSE:APC), Apache Corporation (NYSE:APA), Occidental Petroleum Corporation (NYSE:OXY) — could be in play. It’ll be interesting to see what happens in the sector over the next few months.
In the meantime, the RDS-BG deal promises to be a great long term tie-up. Ultimately, it will be the LNG play going forward.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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