Like many investors, we thought Shell's (RDSB) April offer to take over BG Group (BG.) for an implied $85 billion was a bit on the rich side and thus a very good deal for BG's shareholders. But offers funded with the acquiring company's equity possess an interesting quirk: the more the market dislikes an acquisition and the market certainly didn't like this deal, the cheaper the acquisition becomes.
The cash portion of Shell's offer is paying each BG shareholder £3.83 per share. At current share prices, that is equal to roughly 30% of the total consideration on offer.
The rest of this acquisition will be funded by issuing Shell equity to replace BG's outstanding stock. The price of Shell's London shares has declined 15% since April 7, the last trading day before the merger announcement. This decline in the company's market value has had the impact of reducing the implied offer price for BG investors to £12.20 per share from an initial £13.67.
Why Invest in Shell?
Once finalised, the BG deal will see Shell's proved reserves and current production increase 25% and 20%, respectively. Of BG's assets, the crown jewel is its Brazilian oil interests in the Santos Basin, which are estimated to hold more than three billion barrels of recoverable oil resources. These oil fields have the potential to be producing 500 thousand barrels per day by the end of the decade.
Critically, BG was an early entrant into Brazilian presalt and was given fiscal terms that are far more generous than are currently on offer for new projects, such as Shell's stake in Libra, given the changes to Brazil's petroleum laws.
We estimate BG's Brazilian assets can break even at roughly $35-$40 per barrel, making this some of the lowest-cost oil in the world. That said, Petrobras is the operator, which increases risk, given the bevy of issues that firm faces.