Shell takeover of BG Group may be first in wave

Wednesday's announcement of Royal Dutch Shell's $69.7 billion takeover of BG Group - the company forged in the 1980s from the exploration arm of the former state-owned gas monopoly British Gas - has traders and analysts speculating that it might be the first in a wave of acquisitions after the rout in oil prices.

Should that happen, it would resemble the deals of the late 1990s that restructured the industry. As oil prices slid then, BP bought Amoco for $56 billion in August 1998, and Exxon acquired Mobil for $80 billion that December.

Both deals were announced just weeks before Brent crude reached its trough of $9.55 a barrel. As the market recovered, other deals were done worldwide, including Chevron's scooping up Texaco, and Conoco's taking out Phillips.

Then, as now, producers were battling for market share, pumping at will to force out the more inefficient drillers, sending crude prices down about 50 percent in 14 months.

Now, the process of driving out the weak already has begun, with the U.S. rig count plummeting almost in half in four months and signaling that a decline in supply - and higher prices - may be ahead.

Shell "could have waited for the oil price to fall to $40, but if you look from a long-term perspective, it is neither here nor there," said Harry Tchilinguirian, BNP Paribas's head of commodity markets strategy. "If you think that oil is going to $100, then these assets are undervalued."

The price of oil fell $3.56 Wednesday to $50.42 a barrel in New York.

The Shell/BG deal is more than a bet on commodity prices, Tchilinguirian said, because it allows Shell to cut costs while gaining strength in global natural-gas markets, expected to grow more quickly than oil.

Shell said the deal is predicated on higher prices: Brent in 2016 at $67 a barrel, at $75 in 2017, then $90 a barrel through 2020. Those forecasts are consistent with the Wall Street consensus: the 2016 median at $70, then $75 in 2018, according to data compiled by Bloomberg.

The deal makes Shell, Europe's largest oil company, the pre-eminent player in global natural gas and adds world-class fields in Brazil to its holdings.

The industry's biggest deal in at least a decade will push Shell further into producing, shipping and selling gas as it bets on China and emerging economies switching from coal and oil to cut pollution.

The merged company, led by Shell CEO Ben van Beurden, will boast a market value twice the size of BP and will surpass Chevron. Shell, struggling to rebound from its worst production performance in 17 years, will swell its oil and natural-gas reserves by 28 percent and inherit a management team that carved a unique niche in liquefied natural gas.

The combined entity will be the largest producer of LNG among international oil companies, van Beurden said. It would have delivered 45 million metric tons of LNG in 2014, including 11 million tons from BG. Shell's equity LNG capacity, at projects from Australia to Russia to Nigeria, was 25.6 million tons a year at 2014's end, he said.

BG is producing gas in the Haynesville Shale in Texas and the Marcellus Shale in Pennsylvania and West Virginia, and plans to export LNG from from the Lake Charles facility in Louisiana.