Shell cuts 2016 spending by $2 billion as it prepares for BG

RAKTEEM KATAKEY December 22, 2015

THE HAGUE (Bloomberg) -- Royal Dutch Shell Plc, Europe’s largest oil company, further reduced spending plans for this year and 2016 as it prepares to take over BG Group Plc amid slumping prices for crude.

The combined company plans to spend $33 billion next year, lower than Shell’s previous guidance of $35 billion, the company said Tuesday in a statement. Shell also cut its spending forecast for this year by $1 billion to $29 billion.

Oil’s collapse to less than $37/bbl from about $55 on the day the deal was announced in April has prompted some investors to question whether Shell is paying too much. The oil producer has justified the deal by saying that it boosts its ability to maintain dividends, makes it the world’s biggest liquefied natural gas company and gives it oil and gas assets from Australia to Brazil.

“The two companies are combining during a low oil-price environment and cutting their spending plans makes a lot of sense,” said Jason Gammel, a London-based analyst with Jefferies International Ltd. “This moves the plans for the deal forward.”

The acquisition will break even with Brent crude prices in the low $60s and add to operating cash flow per share at $50/bbl in 2016, the company said Tuesday. It expects the deal to be accretive to earnings per share, excluding identified items, in 2017 at $65 Brent prices.

Shares Rise

Shell’s B shares, the class of stock used in the deal, rose 2.9% to 1,493 pence in London. BG gained 3.3% to 929.7 pence.

Shell in April offered to pay 0.4454 of its B shares and 383 pence in cash for each BG share in a deal valued at $70 billion. A decline in Shell’s stock has cut that to about $53 billion as of Dec. 18, the company said in Tuesday’s statement.

Shell’s shareholders are scheduled to vote on the deal on Jan. 27 and BG’s the next day. Shell requires the backing of 50% of its holders. In BG’s case, votes in favor must represent at least 75% of the total value of BG shares. The merger is likely to become effective from Feb. 15, Shell said.