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Shell Sharply Reduces BG Merger Value, Lowers 2016 Capex Plans

Royal Dutch Shell plc has reduced its global capital spending by $2 billion to $33 billion in 2016 to deal with low commodity prices and prepare for the pending takeover of BG Group plc. It also slashed the value of the BG merger, first announced last April, by $17 billion.

The reduced capital expenditure (capex) outlook was included in the prospectus and circular published Tuesday following a unanimous recommendation by the board to move forward with the BG merger. Shell and BG have scheduled shareholder meetings in late January to vote on the plan, with a deal expected to be completed by mid-February.

Shell has cut capex by about $12 billion this year from 2014 and cut thousands of jobs to ready for "several years" of low prices (see Daily GPIDec. 14July 30). Many investors questioned whether the merger should move forward because of the low commodity price forecast.

CEO Ben van Beurden sought to discount investor concerns, again pushing BG's portfolio, which he has said several times this year would bolster Shell's already strong liquefied natural gas (LNG) and offshore portfolios.

"The combination with BG represents a tremendous opportunity to create value for both sets of shareholders, particularly in deepwater and LNG," van Beurden said. The merger offers "a strong platform to refocus the company, to create a simpler and more competitive Shell."

The merger would enhance Shell's ability to cover investments and dividends in "any reasonably expected oil-price environment," the CEO said.

However, Shell now values the BG cash-and-stock deal at $53 billion, sharply below the $70 billion price tag when the merger was announced in April (see Daily GPIApril 8). The long-term forecast for oil prices needed for the BG deal to break even is in the low $60/bbl range, according to the prospectus. Shell expects the merger to contribute to cash flow from operations in 2016 if benchmark Brent crude prices trade at $50/bbl or higher. Brent recently was trading at around $36.

The Anglo-Dutch major expects to find more than $3.5 billion in pretax synergies with the merger. Shell also expects operating costs to fall by $4 billion this year, about 10% lower than in 2014, and by another $3 billion in 2016.

The highest priority is to reduce debt to repair the balance sheet, as Shell's net-debt-to-total-capital is seen inching toward 25% from 13% with the merger. The BG transaction is expected to be accretive to earnings/share in 2017 with Brent oil averaging $65/bbl, Shell said.

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