Unsurprisingly, then, news that Royal Dutch Shell is to buy BG (which we tipped last month) in a £47bn deal - the 14th largest M&A transaction ever - has been largely well received. Even if, predictably, Shell’s shares have weakened in the immediate aftermath of the news, most view the longer term benefits to the Anglo-Dutch giant favourably – not least the massive presence in LNG, or liquefied natural gas, it brings. True, the premium it’s paying is fairly punchy, but it’s a lot less than it would cost to develop such assets itself; BG’s strategically important Australian LNG facility, in prime position to service Asian markets, has cost $20bn alone.
It’s not easy to believe, either, that M&A in the oil industry could possibly destroy much more value than the plunging oil price already has, which is why attention is now turning towards those producers that could be next to be snapped up. There are many good, mid-tier producers here on the London market that, like BG, have shed huge amounts of value and which have bounced back strongly this week, including Premier Oil, Soco and Enquest. Another at the smaller end of the scale is Aim-traded Ithaca Energy, whose results we’ve covered this week on page 54 – its shares are trading at a whopping 80 per cent discount to book value.
Some are also betting that the worst of the oil price rout is behind us, interpreting falling US production in March as evidence that destabilising influence of shale extraction will be a relatively short-lived. As Mark Robinson notes on page 39, global oil production is set to climb by a fifth over the next two decades, driven by emerging market demand. Gas usage is set to soar, too, as it takes an increasing proportion of the electricity generating mix – and let’s not forget that even if the internal combustion engine goes the way of the dinosaurs the power to run electric cars has to come from somewhere.
But it’s important not to get too carried away right now. While the hydrocarbon economy is likely to around for some time yet, the emergence of such consolidating M&A is a signal that conditions are still difficult, especially for those smaller companies reliant on financing to fund drilling programmes. Caza Oil & Gas, whose results we also cover this week, is one such example of a company sailing dangerously close to the wind. In short, while it’s certainly time to start playing the oil and gas sector recovery, investors still need to be selective.
