More than 30 funds hold BG Group in their top-10s, according to FE Analytics, and are set to capitalise on the deal for Royal Dutch Shell to buy the oil and gas exploration firm.
The deal, which values BG Group at £47bn, is good news for funds such as Threadneedle UK, M&G UK Growth and Blackrock UK Equity, as BG Group’s shares initially jumped by 32 per cent when the FTSE 100 opened this morning.
The gains have since fallen back, with the shares trading 38 per cent up by the end of the session.
The deal means Shell is offering 0.45 Shell B Shares and £3.83 in cash per BG Group share. This is a premium of about 50 per cent to the firm’s 90-day trading volumes.
Shell also confirmed that existing BG Group shareholders will receive higher dividends of $1.88 per share this year and also said that the company hopes to commence a share buyback programme in two years’ time of at least $25bn.
The news means that the fund managers who own BG Group can breathe a sigh of relief, following the company’s disappointing performance last summer when its share price fell by almost 30 per cent.
Performance of stock vs index over 3yrs
Source: FE Analytics
Fidelity’s Michael Clark (pictured) believes that Shell’s acquisition of BG Group occurred for two main reasons.
“First, although BG had some first class assets, it has struggled to develop them as smoothly as hoped in recent years. Shell has a wider pool of expertise and substantially greater access to investment capital,” he said.
“Second, this gives Shell a presence in the productive zone off the coast of Brazil and will ensure that Shell’s own production is maintained over the medium term, taking away the requirement to make large discoveries to offset natural depletion.”
“It’s a good deal for BG shareholders, clearly, but also good for shareholders in Royal Dutch Shell. There is no danger that Shell will change its dividend policy.”
The £2bn Threadneedle UK, managed by Chris Kinder and deputy-managed by FE Alpha Manager Leigh Harrison, allocates a 2.5 per cent weighting to BG Group, placing it in their top ten holdings.
The four FE Crown-rated fund, which hold a Square Mile rating of ‘A’, invests primarily in blue-chip UK companies that have strong franchises. However, these reliable stocks are complemented by some cyclical holdings, meaning that Kinder can at times take a contrarian stance.
This seems to have paid off in this instance, as the oil giant merger has boosted the value of two large oil companies at a time when sentiment would suggest that oil and gas are somewhat unfashionable.
While the stock price of BG Group has rocketed dramatically, Shell is set to reap the benefits of the deal by enhancing its position in liquefied natural gas.
Ian Forrest, investment research analyst at The Share Centre, said: “For Royal Dutch Shell the logic of the deal is clear – it would instantly turn the group into the largest independent natural gas producer in the world with the resources to fully exploit BG’s vast fields in East Africa, Brazil and Australia.”
One investment vehicle that is set to benefit from large holdings in both companies is the £205.6m AXA General Trust, which has 4.6 per cent of its assets in Shell and 2.9 per cent in BG Group.
The fund, which has an 11.2 per cent weighting to the oil and gas sector, has had a disappointing five years and has a bottom quartile Sharpe ratio of 0.34 per cent, which is 0.17 per cent lower than its peer average.
However, over the last year, AXA General Trust has made higher total returns than its peers and the FTSE All Share, as shown in the graph below.
Performance of fund vs sector and benchmark over 1yr
Source: FE Analytics
Out of the 349 funds that hold Shell in their top 10, many of the biggest holders are tracker funds such as Clerical Medical FTSE 100 Tracker which holds a 5.02 per cent weighting, and Halifax UK FTSE 100 Index Tracking which holds 4.9 per cent.
This would suggest that active funds with could have missed out on a lucrative investment opportunity if they have avoided this out of favour sector.
However, Laith Khalaf, senior analyst at Hargreaves Lansdown, warns that the huge combined stock of Shell and BG would make up approximately 9 per cent of the FTSE 100, which would increase concentration risk.
“Tracker fund investors should pause to consider how much of their portfolio is dependent on the performance of just one company in this scenario. This is particularly the case for investors in FTSE 100 tracker funds, though it also applies to FTSE All Share tracker funds,” he said.
One actively-managed fund that hasn’t missed out on the oil merger is the ethical F&C Responsible UK Equity Growth fund, managed by Catherine Stanley.
The four FE Crown-rated fund holds BG Group in its top five holdings, allocating the company a weighting of 2.9 per cent. Stanley generally aims to invest in an ethically-screened spread of UK equities, which means that the fund usually has a significant exposure to medium and smaller companies.
Performance of fund vs sector and benchmark over manager tenure
Source: FE Analytics
The F&C Responsible UK Equity Growth fund isn’t the only ethical investment vehicle to hold BG Group in their top 10 - Kames Ethical Equity and L&G Ethical have also allocated weightings to the company of 2.4 per cent and 3.55 per cent respectively.
Conventional funds holding BG Group include household names such as Fidelity UK Growth, Schroder Prime UK Equity and Baillie Gifford UK Equity Alpha.
However, some financial experts believe that investors should remain vigilant amid the market euphoria today.
Iain Armstrong, equity analyst at Brewin Dolphin, said: “Our initial opinion is quite cautious, given the industry’s track record in destroying shareholder value. However, in the long term, the combined group will benefit from being the second largest oil and gas company.”
“The $25bn share buy back from 2017-20 will also help to offset the earnings per share dilution from the increase in the number of shares but the reduction in return on investment capital in the near term is significant and the boards of both sets of companies will have a huge task on their hands to convince shareholders.”
“Ultimately, we think that they will succeed and there will be one less company for analysts to follow.”
Pascal Menges, manager of the Lombard Odier Global Energy fund, believes that the merger simply shows ‘Big Oil’s’ growth strategy over the last 10 years is bust, as expensive oil production methods are now ill-placed to cope with the low oil price.
“What next? Shell’s purchase of BG Group heralds a scrabble by big oil to ‘high grade’ – improve the overall quality – of their portfolios. It didn’t have to be this way,” he said.
“Low oil prices in the early 2000s offered a window to pick up quality reserves and production at depressed prices. Instead they sat on their hands and waited until later in the decade to embark on pricey investments in new oil sources.
“With BG Group, Shell gets exposure to Brazil’s vast Santos Basin reserves, and further involvement in the integrated gas (LNG) market. But it comes at a hefty price.”
“Management will have their work cut out to execute the deal and generate synergies and assets sales. The risk of indigestion is not small.”