Thursday tips round-up: Royal Dutch Shell, BG Group

After nearly a year of constant speculation regarding a possible bid Royal Dutch Shell has finally made a move for BG Group. Such bold action was certainly called for. If successful the transaction will boost the Anglo-Dutch company’s ailing crude reserves. Over the last three years it has only managed to replace about 80% of its crude reserves. Nonetheless, the two firms might hit regulatory hurdles, as a tie-up would create the world’s largest natural gas producer with possible gains in its pricing advantage on liquefied natural gas, especially in Europe.

More importantly, the logic of the deal is premised on assumptions such as an average oil price of $90 a barrel in a few years’ time. “What makes those assumptions plausible is unclear. To truly score this deal must make sense near the current oil price,” writes the Financial Times’s Lex column.

For those lucky enough to have been caught owning shares in BG Group when news of Royal Dutch Shell’s takeover bid broke it makes sense to hold on until the gap between the mooted purchase price and BG’s current stock price narrows. The curious reaction in the share price of BG Group, which dropped back after nearing the mooted bid price, is a clear reflection of the multiple hurdles which the transaction will have to successfully surpass before it completes.

First there is the regulatory risk, as many authorities in several jurisdictions may still wade in and muddy the waters. Shell also needs to finance £13bn in cash payments to BG shareholders alongside another £25bn to pay for a share buyback programme to support its stock, all the while maintaining its dividend steady. “Should the price start to rise to approach the deal terms, and bearing in mind it is a year or so until you get your money and Shell shares, I would be tempted to take profits in the market,” so hold, says The Times’s Tempus.