Time, and Oil Prices, Ticking for Shell-BG Deal

Rising oil prices are putting Royal Dutch Shell (RYDAF) under pressure to execute its landmark $70 billion deal to buy rival BG as soon as possible before investors in BG start to take a more critical look at the terms.

Announced three weeks ago, the deal was seen as a bold bet by Shell on the oil price recovering to $80-$90 per barrel within three years, justifying a 50 percent premium the Anglo-Dutch giant agreed to pay for BG in the biggest oil merger of the decade.

The cash and share deal followed a relatively low oil price of around $55 per barrel during the first three months of 2015.

That means the conversion rate was arguably more favourable for Shell shareholders as its stock is more resilient during periods of cheaper oil. BG stock tends to perform better when the oil price recovers because it eases concerns over the development of expensive projects, such as in Brazil and East Africa.

Since the cash and stock deal was first discussed by Shell and BG's executives over a phone call in mid- March, the price of oil has risen by 25 percent to $65 per barrel.

Given that the deal was based on the average share price of BG stock in the three months to April 7, BG's shareholders risk feeling they are not getting full value for that oil bounce.

"The maths would suggest that were the oil price at or above $80 then Shell would be snaring BG for a very attractive price," said Matthew Beesley, head of global equities at Henderson, which has $81 billion under management including BG's stock.

"While the total determination is of course dependent on the level of Shell shares at the time of issuance to BG shareholders, above $80 its not inconceivable that BG shareholders could start to agitate for a higher bid or indeed a competing bid," added Beesley.

BG investors will receive 383 pence in cash and 0.4454 Shell B class shares for each of their BG shares. At current prices, that values BG shares at around 13 pounds, a premium of around 12 percent to where they now trade.

Shell, which reports its first quarter results on Thursday, declined to comment.

ANTI-TRUST OBSTACLES

Ivor Pether, senior fund manager at Royal London Asset Management, which has $82 billion under management including Shell stock, said he believed that even at $75-$80 per barrel the deal worked for Shell both strategically and financially.

"If the oil price shot up to that level while the deal was completing it could prompt some debate about the value being offered to BG holders. But you would have to believe the oil price rise was here to stay," he said.

"I don't expect major regulatory hurdles, but the timetable isn't clear yet," Pether said adding that Shell needs clearance from anti-trust authorities in Brazil, the EU, Australia and China before it can issue offer documents to BG's shareholders.

Shell has said it does not expect major obstacles in obtaining anti-trust clearance but has indicated it could extend into 2016 given the complexity of talks.

"With CEO Ben van Beurden loudly espousing the strategic rationale of the deal and the role it can have in foisting change upon Shell, they'll be looking to get it approved by regulators and closed as soon as they can - just in case," said Beesley.

Van Beurden is determined to make Shell a mega-player and the merger with BG will allow Shell to overtake its top rival U.S. ExxonMobil as the largest hydrocarbon producer as early as 2018 thanks to new huge fields in Brazil and Australia.

Van Beurden has already travelled to Brazil, where he met with the country's leadership as well as Trinidad, where BG has large gas facilities.

China and Australia will be next on the agenda as the Shell leadership is perfectly aware of the pressures the rising oil price has created, according to industry and banking sources.

Back when the deal was first discussed, it wasn't only the oil price but several other factors, which helped Shell persuade BG's board it was the right deal.

"The stars really aligned back in March," one senior source familiar with the discussions said.

Several days before Van Beurden called BG's veteran chairman Andrew Gould to offer the deal, BG's stock fell heavily on news that rival Portuguese firm Galp saw delays to projects in Brazil because of an ongoing corruption probe.

However, in the past few weeks the general mood in the oil market has improved, with most industry watchers saying prices could rise further from now on.

By Dmitry Zhdannikov, Sinead Cruise and Ron Bousso