5th February 2016
Oil and gas firm BG Group has reported profit declines ahead of the Royal Dutch Shell takeover.
BG Group has reported for the final time before it is taken over by the oil giant Shell. It reported earnings before interest, taxes, depreciation and amortisation (EBITDA) from its upstream operations was £4.2 billion, down 35% on the previous year.
Helal Miah, investment research analyst at The Share Centre, said its liquefied natural gas (LNG) business also saw EBITDA fall 45% to $1.5 billion.
‘However investors should note that these falls were mitigated by higher production levels as projects in Brazil and Australia ramp up and increased LNG cargos volumes, efficiencies and asset disposals,’ he said.
‘It is worth pointing out to investors that group earnings were still down 58% to £1.7 billion when asset impairments were also taken into account. However, these numbers were more or less in-line with expectations although some positives should be taken away from the increased production levels.’
BG will not pay a final dividend given the takeover by Shell which will happen on 15 February.
Shell also produced its full year results, with earnings down 80% – which had been expected by markets.
‘In short, earnings fell 80% as the upstream business took a beating due to the lower oil price,’ said Miah. ‘Like the most integrated oil companies, the downstream businesses did much better and this subsequently helped mitigate the numbers.’
He said the group’s management also announced further measure to keep costs down, including lower capital expenditure for 2016, postponement of certain projects and a further 10,000 job losses globally.
‘These measures measures have enabled Shell to carry on paying its dividend which was thought to be under pressure by many in the market. The company have said that it expects the $1.88 dividend for 2015 to be matched in 2016,’ said Miaj.
‘Todays’ results from BG should be the last one published by the group as by the next quarter it is likely to be merged in with Shell. For investors in the merged company, it should mean a company with a stronger balance sheet which should benefit from the cost synergies, particularly from the LNG businesses where synergies are estimated to be in the region of $2.5 billion per annum. This will result in the new group being one of the most dominant in LNG on the world markets. Furthermore, the merger should provide more geographical diversity and help the company navigate through the lower oil price environment.’
Miah believes ‘questions will still be asked about whether Shell has paid too much for BG, given that oil prices are now half of what they were when the takeover announcement was made. However, the company will rightly defend themselves by saying this is a deal for the long term’.
He added: ‘In the meantime, we continue to recommend Shell as a ‘buy’ for investors seeking income. However, we now take the view that the risk relating to the group has gone up to medium, given the volatility in oil. If oil prices stay lower for longer, then further capex and cost cuts can only protect them for a certain period of time and they will ultimately be forced to consider a cut to their dividend.’