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2015-09-14 18:30:00

SHELL & BG RISKS

SHELL & BG RISKS

Investors's fears that Royal Dutch Shell will fail to complete its planned £43bn acquisition of BG Group have been exaggerated, Shell's chief executive has said.

BG shares are trading at a substantial discount to the value of Shell's offer, suggesting some in the market are concerned the deal will not go through.

But Ben van Beurden told the Financial Times that the two companies' share prices had been "knocked about" by recent turbulence in stock markets, and their valuations were driven by "risk aversion and volatility at the moment, rather than careful considered pricing".

He reiterated Shell's commitment to maintaining its dividend, even though the shares had an "outrageous" yield of about 7.8 per cent, reflecting investors fear that the payout could be cut.

Mr van Beurden suggested that over time there was likely to be a floor under oil prices at $70 per barrel, but said he did not know when the market would get back to that level.

"It doesn't help me making decisions today. Today's decisions are driven by today's oil price," he said, adding that decisions were based on "what is it that I can afford to spend today."

At Shell's closing price of £16.15 on Friday, down 34 per cent in 12 months, its offer for BG is worth about £11.02 per share, a substantial premium to the target's latest price of £9.90.

Speaking after a presentation to investors in New York last week, Mr van Beurden argued that those prices did not accurately reflect investors' views on whether the deal would go ahead.

He was "categoric" that the company had "no intention to walk away from this deal," he said.

To complete the acquisition, Shell needs to secure regulators' approval in the EU, Brazil, China and Australia, and then win the backing of both companies' shareholders.

When the takeover was announced in April, oil prices appeared to be recovering, but they have since slipped back, stoking expectations that they will remain lower for longer than expected earlier in the year.

The price of Brent crude for delivery at the end of 2018, for example, has dropped from about $70 in April to about $63 today.

That decline has made the economics of the BG deal look less attractive for Shell. However, Mr van Beurden said the takeover still offered a "strategic transformation" for Shell that would give it a leading position in the two most exciting parts of the industry: deep water developments and liquefied natural gas.

He said he was confident that investors would back the deal, allowing it to close as planned early next year.

"At the moment I do not hear any shareholders not supporting the deal," he said.

There was a "modest" risk that Shell could fail to secure key regulatory approvals, he added, but it had already been cleared by the EU, South Korea and other countries and was making "a lot of good progress" elsewhere, including in China.

Buying BG would strengthen Shell's ability to maintain its dividend, he said even if there might be concerns over its impact in the first year or two.

A dividend that was maintained and rose over time in line with inflation was "a core value proposition for our shareholders," and was therefore something that "the board as well as our executive team really stand by as a commitment".

He could imagine that investors would worry about Shell's ability to continue paying the dividend, he said, in part because of the extra debt that the company will take out to pay for the cash component of the offer, which represents about a third of its total value.

To answer that "legitimate question", he said, Shell was promising to maintain the dividend at $1.88 per share for this year and at least that amount again for 2016.

"That is an assurance that we really know as a company and as a board we can stand by, because the dividend is such an iconic item within Shell," he said.

Beyond that, he added, the company had no formal commitment, but he suggested the financial constraints on the group would ease.

The key risk period seen by investors was in the near term, he said.

After that, both BG and Shell would have new projects coming into production to boost cash flow over the coming years. Oil prices were also likely to rebound, he suggested.

"A large segment of our investors also realises that in the end, oil price fundamentals will reassert themselves," he said.

ft.com

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