BG scoop secures Shell’s deepwater, LNG status: Wood Mackenzie

EDINBURGH -- "First mover advantage secures Shell industry leading positions in deepwater oil and LNG," says Tom Ellacott, V.P. of corporate analysis for Wood Mackenzie, reacting to the Shell BG deal.

The deal values BG's equity at $70 billion, plus net debt of $12 billion and completion is expected in early 2016. According to Wood Mackenzie, Shell has made a compelling first move on the M&A market, using its financial strength to take advantage of the slump in oil prices.

Here are four key takeaways from the merger as identified by Wood Mackenzie:

1. It’s about deepwater oil: A real prize for Shell is the oil in deepwater Brazil. 60% of BG’s production in 2015 is gas, but the proportion will decline over the next 10 years to 50% as the giant Brazil pre-salt fields come onstream. By 2025, Brazil will be delivering 550,000 bopd—13% of BG/Shell’s total production, the biggest single country position in the combined portfolio.

2. An LNG behemoth emerges: The deal combines the two largest IOC LNG players to create an industry giant. By 2018, the combined entity will control sales of 44 MMtpa of LNG, making it the largest LNG seller in the world. Shell will have unrivalled flexibility and exposure to virtually every major LNG supply source and market globally, which means significant scope for portfolio optimization. The move re-energizes Shell's LNG development pipeline, adding a leading U.S. position, entry to East Africa, and new options to expand an already giant presence in Australia and Canada.

3. Unlocking the hidden value: The sum of the parts is often bigger than the whole in a merger of two, high quality diverse portfolios—especially buying at the low point of the cycle. Shell has said it will sell $30 billion of assets between 2016 and 2018. Wood Mackenzie sees scope for significant value creation, once the asset market picks up, in trading out of country positions or assets that no longer fit.

4. Floodgates open? Most of the big players—IOCs and NOCs—are weighing up opportunistic acquisitions, but few have the means or appetite for deals anywhere near this scale. Most of the Majors are hamstrung by near-term financial stretch, and Asian NOCs are contending with growing political scrutiny of M&A strategy, past and future. According to Wood Mackenzie, Exxon Mobil stands out as the most likely candidate to pull the trigger on the next big deal. Companies that are unloved by the market but big in strategic resource themes—U.S. tight oil, East Africa LNG, deepwater or frontier exploration—will be the focus of their attention. But don't expect a wave of late 90s style consolidation.