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Stock Strategist

Shelling Out Too Much for an Oil Megadeal

High offer price for BG Group drags Shell's fair value estimate lower.

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On April 8,  Royal Dutch Shell (RDS.A) (RDS.B) (RDSA) (RDSB) announced its intention to acquire  BG Group (BRGYY) (BG.) in a $70 billion cash-and-stock deal that values BG’s equity at GBX 1,350 per share, or 11% above our GBX 1,200 fair value estimate for BG at the time the deal was announced. The deal will be roughly 70% stock and 30% cash, and it's expected to close in early 2016. Our BG thesis has been that near-term execution problems and political issues in Brazil and Egypt were creating an attractive entry point for long-term investors. And to be sure, a company of Shell’s size and financial health is in a great position to take a long-term view. But the 50% premium Shell is offering over BG's April 7 closing price is a rich offer. We've increased our BG fair value estimate and lowered Shell’s to reflect the offer price.

BG Group is a major player in natural gas and liquefied natural gas production, areas that Shell has been focusing its capital spending. BG Group’s assets complement Shell’s by providing access to Brazil’s attractive deep-water plays and the North American shales, among other resources. 

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Stephen Simko does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.