Shell deal for BG could spark new takeovers

The deal by Shell to buy BG Group could set off a series of takeovers in the oil and gas sector. Market analysts Fitch Ratings made the prediction in light […]

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By Sumit Bose

The deal by Shell to buy BG Group could set off a series of takeovers in the oil and gas sector.

Market analysts Fitch Ratings made the prediction in light of the reaction of the financial markets and the fact the deal shows a huge company like Shell, has confidence in the sector in a time of relatively low oil prices.

Fitch predicts Shell’s competitors are also likely to look for partners, so they are not “at a disadvantage when the cycle turns”.

It added: “The recent fall in oil prices has dragged down the valuations of energy groups, particularly weaker ones, making deals more attractive.”

Wednesday’s announcement of the £47bn takeover is certain to improve Shell’s position. Fitch Ratings believes the deal has enhanced its position in the LNG market and boosted upstream liquids production.

It predicted: “The combination would increase Shell’s oil and gas reserves by 25% and we estimate production to rise to around 2.9-3.0m barrels a day of oil and oil equivalents in 2015-2017, from 2.27m in 2014.”

Although it says not many companies have Shell’s financial clout, several could embark on takeovers using equity rather than borrowing. This it claims “would allow even relatively cash-strapped companies to be able to find a deal.”

The experts concluded the time was now right for more deals.

“Smaller companies are typically more vulnerable to low oil prices because of higher leverage, higher production costs and poorer access to external funds.

“This can make them attractive targets for larger groups with better access to funding and technology.”