After years of planning Shell finally took the plunge and pounced on BG Group. This £47 billion acquisition is a big deal for the oil and stock market and could have important ramifications for income investors. After all, Shell accounts for about 8% of all the dividends paid by companies listed in the UK and that total is currently forecast to be £91 billion in 2016. First it might help to get a sense of scale.
Shell paid out $9.44 billion in dividends in the 2014 financial year while BG distributed $1.024 billion, but that was a year when the oil price started at $94 a barrel, peaked at $110 and ended at $53. This year oil companies expect the average to be a lot less than the $98 achieved in 2014 and that has major implications for their capacity to pay dividends. Initially it might be thought this deal was a clever way for Shell to use BG's cash flow to fund its commitment to an onerous dividend. But it is more complex than that.
Shell is offering 383p and 0.4454 of a new Shell B Share for each of BGs 3.414 billion shares meaning it will issue another 1.52 billion shares. Shell has promised to pay at least $1.88 per share in 2016 on its new and existing shares which has the effect of increasing its obligations by $1.834 billion over and above the previous payout from BG. While this increases total UK distributions by over £ 1 billion it does raise the question of its sustainability.
However, investors can be reassured, at least partially, by the healthy cash flow from operations both companies enjoyed in 2014 of $7 billion for BG and $44 billion for Shell. Lower oil prices mean those numbers could halve this year but then so will capital expenditure which was $9 billion and $32 billion respectively in 2014 so the net change may not be too drastic.
Moreover, Shell believes oil prices will rebound to about $67 a barrel in 2016, and $75 a barrel in 2017. It is easy, and probably correct, to think that “it would say that wouldn't it". Nevertheless, many oil fields are unprofitable at today's prices and some will probably close, therefore reducing supply and tightening the market.
On top of that there is…
the oil price today has been over $65 now slightly below, it does not make $67 for 2016 especially demanding. Of course there are many unknowns, will sanctions be removed from Iran ? will opec cut production ? what will haven to unconventional oil production ?
what is the likelihood that the deal will complete ? last time I checked bg was trading at a between a pound or two discount to the deal, which seems too much ? surely that makes buying bg, a discount way of buying shell shares ? World oil consumption is rising, the world economy is growing, even europe is on the mend. Of course a grexit would hurt short term, geopolitics impacts on the oil price. So basically I don't know what the oil price will do but shells predictions sound plausible. It gets harder predicting when the oil price would go higher than the $75 - $80 price as there seems to be a lot of capacity that is profitable at this kind of price. (including read drilled shale wells awaiting fracing).
K
