Wednesday 8 April 2015

Shell and BG: Big Business As Usual

Shell's agreed bid for BG has a nice, conventional feel about it - in the context of the oil-price cycle.  We know how to assess this one. 

The various bits that spun out of the old British Gas at demerger in the mid 1990's - BG, Centrica and Transco - all performed much, much better individually, a great endorsement of the split-up strategy.  And they all stayed British ! - which pleases several hardcore C@W commenters.  Centrica remains independent, and Transco went to National Grid.  The big 'Rough' gas storage facility was sold by Transco at an early stage to Dynegy of the US, but bought back in by Centrica a while later.  Does Shell count as sufficiently British to satisfy this atavistic concern ?  Personally I care rather little.

BG was always an interesting company, with assets all over the place.  Trinidad LNG production was once the jewel in its crown, plus a bunch of North Sea gas assets it was not permitted to manage proactively while still part of Old-Monopoly-BG, so it let Amoco (of Chicago) operate them.  More recently it has done good pioneering work in Brazil.  It has long been a target, periodically: and the logical acquirer is a company that really knows how to manage (and value) this lot.

Shell's move is an attempt to emulate BP circa 1998 and call the bottom of the market.  BP, it will be recalled, triumphantly called that particular bottom at $10 and bought Amoco, Arco and BurmahCastrol before anyone else had settled into the starting-blocks.  I have a feeling Shell have moved just a tad too soon, but they may not much care.  This type of deal is 'business as usual', a bigger version of all the little shale-company acquisitions that will happen when their hedges expire and the banks press for debt to be serviced.  Creative destruction - the reason it's hard to suppress capitalism.

[By the way, Shell missed out altogether in 1998-99 mega-takeover binge.  I can reveal that they seriously considered buying Enron!  - but they couldn't understand the books.  In 1998 those books were still just about comprehensible to those who grasped mark-to-market accounting (not Shell, that's for sure).  Of course, three years later they made no sense to anyone ...]

Centrica is even more interesting.  Gazprom is perenially rumoured to be eyeing it for acquisition, but as I have often written here, that's always been bullshit: they never pay cash for anything (and they have even less of that now than usual).  Of course, Centrica is a midstream+retail business, so depressed hydrocarbon prices don't automatically make it a target.  It's twice peaked at around 400p, in 2007 and again in 2013, but has been on the slide for 18 months now.  

Its portfolio weighting is still UK-heavy, with all manner of daft and complex 'obligations' and regulatory constraints as one of the 'Big 6' retailers and a major player in UK power.  Who can see their way through that minefield?  You can never rule out some middle-eastern SWF or far eastern utility with more money than sense.  It has often been said that HMG would block a Russian bid - an empty observation, see above - but what would they say to Qatar or Malaysia?  I really don't know.  

I'd say - if they are offering the usual 180 cents on the dollar, why ever not? - and I hope my pension fund agrees.



Blue Eyes said...

"hardcore C@W commenters"

don't get me started ;-)

"Personally I care rather little"

I care not one metric iota, until there is a competition issue.

Anonymous said...

It can't be long before some wag christens the new entity "ShellGas" - an unfortunate homophone for the luvvies' current bĂȘte noire.

Suffragent said...

So last time they watched the big boys picking all the attractive deals and now it’s their time. The oil price is down and the fruits may be exposed but I think it’s a case of premature extrapolation.

Sid said...

"but I think it’s a case of premature extrapolation."

Be interesting to see how many dump the Shell shares immediately after.

Worth taking a position?

CityUnslicker said...

Oil will be back over 70 by year end. Supply is being crushed and demand is steady nd still rising slightly.

Iran may tank it a bit, but the bottom has been marked out.

BE - You have been assimilated and are a full C@W now!

Steven_L said...

Possibly the worst / bravest trader I've ever met is long oil at the moment. This is after his 'DAX yoyo' theory recently lost him his last £16k.

His best one was losing about £60k long the United States Natural Gas Fund ETF. I'll never forget it when he told me he had bet his life savings on 'US natural gas' a few years back.

Not knowing that the ETF he had bet on buys short dated futures type contracts and loses 1% a month rolling them over would have been bad enough.

When he couldn't offer a basic explanation of 'Henry Hub' or 'Balancing Point' or 'LNG' you'd have though it couldn't get any worse.

But this clown cheerfully and confidently told me he had never heard of shale gas and wasn't really interested in what it was either - because natural gas had fallen well below its long term average.

This is also his current oil thesis, so CU is in good company. But they are probably both due a win, so good luck guys.

Steve's tips:

Safe: Australia to beat West Indies 1/4
Medium risk: England to beat West Indies 3-0 6/1
Risky: Madison Keys to win Wimbledon 25/1 (ew)

Anonymous said...

Back over $70 eh - yay those Xcite shares may recover a bit then, though with them paying 12% on that loan from a company that's absolutely not connected with the chairman they'll need another loan sharpish.