Shell – BG Group Merger: What Investors Should Closely Watch

The merger deal between Royal Dutch Shell Plc. (NYSE: RDS.A) and BG Group Plc is just around 3 weeks away.

The Shell- BG Group deal can be considered as the largest energy deal of the previous year. However, Shell is finding it difficult to convince its stockholders to give it a go signal. According to sources, the CEO of Shell Mr. Ben van Beurden, as well as Finance Director Mr. Simon Henry is considering to conduct a series of conferences with US shareholders. In the previous week, it held a campaign in London.

The merger deal will be voted on by the shareholders of Shell on Jan. 27, while BG Group stockholders are scheduled to vote on Jan. 28. In order to move forward, this deal requires the majority of votes of the shareholders of Shell, and 75 percent of the votes from the stockholders of BG Group. Market players are currently studying the costs and benefits of this deal.

One of the most important factors that investors should keep an eye on would be the financial performance of the two oil companies during the past few years. In general, the previous year was not a good one for the energy industry. Exxon, BP, as well as Chevron have all reported a drop in their revenues because the prices of crude oil constantly placed bearish pressure on their financial position.

For the third quarter of fiscal year 2015, Royal Dutch Shell reported a net loss amounting to $6.1 billion. The oil giant as a net profit of $5.3 billion during the same period in the previous year. On the other hand, BG Group reported a net profit totaling $1.24 billion during the third quarter of fiscal year 2015. This figure is lower compared to the $1.98 billion during the year-ago quarter. Even though the oil company witnessed a 37 percent decline in earnings, the performance of BG Group can still be considered better compared to that of Shell.

After the merger deal was announced, the stock of Royal Dutch Shell dipped by 26 percent,while the stock of BG Group edged higher by 7 percent during the same period of time. As the prices of oil hit their 12-year lows in the past week, the stock of Shell slumped further by 12 percent year-to-date.The company has offered a 50 percent premium to the stockholders of BG Group back in the month of April. Yet, the continuous decline in the prices of the commodity has minimized this premium to below 10 percent.

Royal Dutch Shell is projecting cost synergies amounting to $3.5 billion from this deal with BG Group. Aside from this, there will be other revenue synergies that will arise from this merger.

When this deal is completed, it will make Shell the leader in the liquefied natural gas (LNG) market. Even though the LNG market is also currently being hit by low prices, it is anticipated that it will witness an increase in demand soon. Other similar companies, such as Chevron, are also boosting their exposure to the liquefied natural gas market.

During the previous week, Institutional Shareholder Services have backed up Shell. Yet, just recently Standard Life Investments, which holds a 1.3 percent stake in BG Group and 2.1 percent in Shell rejected the merger. According to the investment firm, they are planning to reject the deal since it will not be good on the part of the stockholders of Shell. Clearly, investors are divided on this issue, but they will have to make their final decisions during the early part of this year.

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