Shell’s $70 billion takeover of BG could herald wave of mergers

Shell has agreed to buy British rival BG Group for $69.7 billion in a deal that may signal a new wave of megamergers as the oil and gas industry adapts to lower prices.

Royal Dutch Shell said Wednesday that it will pay the equivalent of $20.32 in cash and stock for each share of BG Group, 50 percent more than Tuesday’s closing price. The deal will boost Shell’s oil and gas reserves by 25 percent, including offshore projects in Australia and Brazil, and give it a bigger presence in the fast-growing liquefied natural gas market, Shell said.

Other energy giants may follow suit as they look to boost growth through acquisitions after increased production in the U.S. helped trigger a plunge in oil prices. The last wave of oil mergers took place in the 1990s after new production from the North Sea, Alaska and Mexico led to excess global capacity and companies linked up to protect themselves or bought weaker rivals.

“Quite a few oil companies are under cost pressure with no sense of the oil price recovering. Companies had got used to $100 a barrel, and many need $40 to $60 to break even so we could see more of these deals,” said Christian Stadler, associate professor of strategic management at Warwick Business School in Britain.

The international price of crude oil has plunged from over $115 a barrel last summer to a low around $45 before recovering somewhat in recent weeks to trade at $58 a barrel Wednesday. Global natural gas prices have also dropped, because most of the natural gas traded internationally is linked to the price of oil.

Analysts at Wood Mackenzie say low prices have prompted most major oil companies to weigh acquisitions, though only a few have the size and resources to pull off a megamerger.

“If you’re looking to the next big deal, ExxonMobil stands out as most likely to pull the trigger,” they wrote in a research note.

Exxon made the last giant oil and gas acquisition when it agreed to buy the U.S. shale driller XTO Energy for $31 billion in 2009.

The takeover of BG Group allows Shell to replace reserves at a time when exploration budgets are being cut and after its attempts to join the U.S. shale boom did not amount to much, Stadler said.

The merger also combines the world’s two largest investor-owned sellers of liquefied natural gas.

This story was originally published April 8, 2015 at 4:29 PM with the headline "Shell’s $70 billion takeover of BG could herald wave of mergers."