In a calculated move, Royal Dutch Shell Plc (NYSE: RDS-A) has thrown its chips on the table. BG Group Plc (OTC: BRGYY, LSE: BG.L) is up for grabs, and it looks like the international oil and gas major will absorb the smaller company in what analysts are predicting might be a wave of new M&A spurred by the lower price of oil.

On April 8, Shell and BG jointly announced a takeover bid to the tune of 47 billion pounds (US$70 billion) in cash and shares. According to the terms of the deal, Shell will pay a value of 1,350 pence per BG share, with 383 pence in cash and 0.4454 of its own B shares. The value represents a premium of 52% on the 90-day volume-weighted average trading price.

LNG A Priority

In addition to synergies and the jewel of deepwater assets off the coast of Brazil, Shell listed LNG as one of the primary factors that led them to the offer.

“I think we will be an absolutely marvelous company when it comes to LNG,” Shell CEO Ben van Beurden said at the presentation explaining the move to investors.

With the acquisition, Shell will increase its equity liquefaction capacity by about 80% from its 2014 position to 45 million tonnes per annum (mtpa) by the end of 2018, when all of the terminals under construction will be finished.

Both companies saw this merger as the acceleration and aggregation of future delivered value.

“The combination of our two businesses is a powerful one, which has sound strategic logic,” Andrew Gould, chairman of the board at BG, said. “BG’s deepwater positions and strengths in exploration, liquefaction and LNG shipping and marketing will combine well with Shell’s scale, development expertise and financial strength. In the low price environment that this industry is facing, there is strength in scale.”

Scale

Indeed, the new combined entity would be the single largest liquefaction behemoth in the world, almost doubling the next biggest, Exxon Mobil Corp. (NYSE: XOM). Shell currently has positions in Australia at the North West Shelf and Pluto facilities. In Asia, it has significant capacity in Brunei, in Malaysia and at Sakhalin in Russia. Oman and Qatar offer even more LNG, and Nigeria, Trinidad and Tobago and Peru plants round out a truly world-wide portfolio of projects that delivered 34 mtpa last year. BG would add to that portfolio with existing equity capacity from Queensland Curtis LNG in Australia, Egyptian LNG and SEGAS LNG in Egypt and further capacity in Atlantic LNG in Trinidad and Tobago and Nigeria LNG.

What’s truly fascinating, however, are the future options the acquisition of BG gives Shell. Shell already is constructing several more projects that will come online in the near future; there is 15 mtpa under construction as part of the proposed 20 mtpa Gorgon LNG project in Australia. Shell is expected to bring the 3.6 mtpa floating LNG vessel Prelude to join the party in Australia by the end of 2017, which is already a significant addition to its portfolio, but BG adds further geographical and numerical advantage. BG has the much-touted first mover advantage capacity contracted through tolling agreements with Sabine Pass LNG, which is expected to come online around the turn of the year, and notably, BG has a foothold on the development of Tanzania LNG, which is racing with southern neighbor Mozambique’s projects to develop the astounding East African offshore gas fields. BG could help Shell consolidate and move forward in British Columbia, as both companies have proposed liquefaction projects there, and undoubtedly the Lake Charles, La., project, which has not yet taken a final investment decision (FID), offers some potential value to Shell, if it is able to make it through the race of other North American projects.

Leaders at the companies believe the new combined business will benefit from the breadth and scale of the enterprise.

“Of course we will be significantly enlarged,” van Beurden said, “when it comes to the equity production we have. We will be significantly enlarged at the market outlets that we have.”

“Fundamentally,” he continued, “and this is where scale really helps, we will now have a long list of supply points and a longer list of demand points, much more optionality to trade in that portfolio, and that’s where the real value sits, because as I said earlier, this is a scale business. Our ability to basically reconfigure that portfolio in a dynamic way, the ability to use that portfolio to also launch new projects—that basically is where the extra value comes from.”

Future Projects

So, where to go from here? During the presentation to analysts, Shell CFO Simon Henry gave some indication of what next steps the company might take as it considers future FIDs in potential worldwide liquefaction projects.

Shell
Source: Royal Dutch Shell Plc

First, he highlighted additions to brownfield projects, pointing out opportunities in Sakhalin, Nigeria and Gorgon. However, he also said that sometimes while they may be “the most attractive,” they are also “likely not the most available,” as those ventures are effectively not controlled by Shell.

Going forward, Henry said Shell would favor projects under their control that would give them diversity of supply, a lower capital cost per unit and the right timing. Under those strictures, he labeled Tanzania and Lake Charles as important opportunities, along with Shell’s Elba Island, which is “partly in flow,” LNG Canada, which has reached its FEED stage, and potentially, the floating projects Browse in Australia and Abadi in Indonesia.

“Those are the key opportunities,” Henry said. “Clearly the cost inflation of recent years and the recent oil price fall has led to the reassessment of all of those projects in one way or the other, but I can’t actually tell you where all of that will come out, but the key drivers will be brownfield to the extent we can, operative opportunities because they’re under our control and most importantly, getting the capital cost down to a level that is robust through cycles.”

Repsol LNG

This is not the first time Shell has acquired a smaller energy company with a robust LNG focus. In January last year, Shell announced it had completed the year-long process of integrating Repsol LNG, which delivered volumes from Peru LNG and Atlantic LNG.

“We’ve integrated the 2013 Repsol LNG acquisition last year,” van Beurden said, “which delivered over $1 billion of cash flow in 2014, ahead of Shell’s expectations for that deal, and this gives us confidence of a successful integration of the BG portfolio.”

Commentary

Analysts have been piling on their predictions and two cents’ worth.

Tudor, Pickering, Holt & Co. (TPH) wrote to their clients in a note, “[the deal] is a conscious decision to de-emphasize U.S. shale and to stick to its strengths (deepwater/LNG). It sets Shell apart from the other super-majors by ensuring long-term growth in upstream production but also in terms of LNG volumes. It gives Shell higher oil price gearing and makes it more of a bet on higher oil prices and LNG prices.”

TPH thought the deal would be positive for BG’s Lake Charles project. “We view BG’s LNG growth as a primary motivator for Shell, with Lake Charles standing as the self-proclaimed lowest cost option in the portfolio. Deal a net positive with Shell’s existing platform and balance sheet helping project reach FID.”

WoodMackenzie noted, “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.”

Simmons and Co. thinks the deal “makes immense strategic sense for Shell, if one takes a long-term view on LNG markets and commodity prices. The acquisition will create an LNG behemoth with unmatched scale and flexibility.”

The Wall Street Journal’s Energy Journal newsletter said the move could provoke a reaction from ExxonMobil, a suspicion that was shared by many other analysts in the sense that the other giant could offer a more attractive offer or go for another, smaller company equal in heft to BG. The Energy Journal also thought that the merger was a bet that Asia and developing countries would continue to rely on natural gas instead of coal.

Whatever other future moves the industry may see from other companies, there stands a new, bigger behemoth around the block, and he has significant added value oriented around LNG.

Contact the author, Brian Mothersole, at bmothersole@hartenergy.com.