Old Mutual Global Investors’ Richard Buxton (pictured) thinks that Royal Dutch Shell’s acquisition of BG Group might not work out the way the oil giant hopes, even though he concedes that the deal is a good strategic fit. 
The £47bn deal for Shell to buy BG Group was dominating the headlines a week ago, leaving many investors who had holdings in BG Group jumping for joy.
On the day, FE Trustnet compiled a list of the funds that held the stock in their top 10 and were therefore set to reap the benefits of the cash and shares offer, which would give investors a 50 per cent premium on BG’s share price.
The general outlook was positive, with Fidelity’s Michael Clark explaining that the merger will maintain Shell’s production over the medium term, taking away the requirement to make large discoveries to offset natural depletion.
He said: “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.”
However, there were also some financial experts erring on the side of caution as they recalled the industry’s track record in destroying shareholder value.
If you were to guess which camp Richard Buxton would fall in, you wouldn’t be blamed for thinking he would be on side of the deal, given that Shell is a top 10 holding in his Old Mutual UK Alpha fund.
But he said: “It’s fascinating to have revealed the fact that twice in the past Shell have gone to the management board to seek permission to buy BG and been knocked back, hence the persistency of the rumours that one fine day these two companies would come together.”
“Clearly it was only because of the weakness in BG price, courtesy of the weakness in the oil price that, that this time round the board of Shell was prepared to sanction it and have a conversation.”
Buxton owned BG for many years, but became concerned in the latter half of last year when the oil price fell. What’s more, he felt that the company as a standalone entity had begun to look increasingly vulnerable in its outlook.
“We let the position dilute substantially through cash flow to a level where it was less than 1 per cent and we sold the stock,” he said.
“So, hands up: after many years of ownership and not being there when the deal came, the very fact that BG were prepared to recommend an offer at a value that was essentially only worth the shares they were trading last summer, [means] my big mistake was not selling them at £13 when I had the opportunity because I was getting nervous.”
When it comes to Shell, its shares were trading at £22.07 on the day before the announcement but fell to £20.13 at the end of session in which the news broke. However, they are currently trading above £21.
Buxton thinks the jury is out on whether this is a great deal or not when considered a three to five-year time scale.
“Strategically [the merger] is a good fit and always has been,” he continued.
“Shell is effectively doubling up its bet on gas and LNG [liquefied natural gas]. A company the size of Shell, with its balance sheet, can deal with delays and slippages in production in a way that is easier … than it is for BG Group.”
“It makes sense for these to sources to be together, but it does require both oil prices to move higher over the next three to five years and crucially for LNG gas prices to be firm.”
Buxton believes that it is unlikely that the oil price will reach more than $60 any time soon. He referenced the large amount of construction occurring in the US to turn import facilities into export facilities, which will have a knock-on effect on prices.
He said: “There’s a lot of licences in there for approval. But actually if this becomes a reality, then we move towards US gas prices which are clearly low, really having an influence on global gas prices.”
“In which case, if that happens over the next three to five years, then I don’t think that Shell will actually make the returns it wants.”
“If I’m wrong on oil and gas prices and in three to five years’ time both of those have rallied nicely, then Shell would have swooped opportunistically at a brilliant moment and got a great deal.”
“Conversely, my concern is, if we have persistently lower oil and low LNG prices come through, then they will have paid a full price for this business.”