Shell to buy BG group in $70B deal

Royal Dutch Shell agreed to buy rival BG Group for $70 billion. Will this spark an increase in M&A in the energy space?

Will Shell, BG Group Deal Trigger Mega Deal Action?

By Features FOXBusiness

A megadeal between Royal Dutch Shell (NYSE: RDS.A) and BG Group valued at more than $70 billion is highlighting action in the energy sector.

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One apparent question is: Will this trigger further large acquisitions in this sector?

“The big picture here is that corporate M&A involving E&P companies has been notably slow over the past several years,” Raymond James Energy analyst Pavel Molchanov said.

Molcahov continued saying there have been very few M&A transactions above $10 billion since Exxon/XTO. 

"During the oil upcycle, asset values were too high in the minds of many prospective buyers. And since the oil price meltdown, the perception has been that the bid/ask spread is too wide,” Pavel noted.

Insofar as there has been M&A, it has tended to be targeted at individual assets rather than corporate deals. To be clear, Raymond James doesn't look at Shell/BG as the harbinger of a megadeal boom.

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The other interesting point to make about the deal between Shell and BG, according to Pavel, is the nearly total absence of North American assets. Shell presumably has multiple motivations for buying BG, but access to North America - especially unconventional resources - is clearly not among them.

Stephen Schork, editor of the Schork Report disagrees. In an interview with Maria Bartiromo on Opening Bell he said this acquisition could be the beginning of a huge string of deals in energy. 

"I think right now we are sowing the seeds for further weakness in the energy complex with price right now. As prices continue to fall through the end of this year, it certainly is going to put more companies, especially in the upstream, the exploration & production side, into play,” Schork said.

Energy stocks getting a bump from the deal include BP (NYSE: BP) and Valero Energy (VLO), while Shell, Exxon (XOM) and Chevron (CVX) are in the red.

Volatility continues with oil which is down more than 4% after the Energy Information Agency (EIA) reported an inventory build of 10.95 million barrels last week, a 14-year high. This far exceeded the Thomson Reuters estimate of 3.43 million barrels and follows a 6% spike in oil Tuesday. 

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