(WSJ) LONDON– Royal Dutch Shell PLC’s $50 billion takeover of BG Group PLC, expected to complete Feb. 15, brings to an end a company that rose from humble beginnings to become the U.K.’s third largest oil and natural gas business.
In the three decades since BG sprung out of the U.K.’s struggling state-run gas firm, it has become an international energy company with assets including highly prized oil fields in Brazil, huge gas resources off Tanzania and a giant facility in Australia to liquefy natural gas. Its LNG business became a pioneer in trading the fuel around the world.
Investors were also attracted by BG’s promises of growth underpinned by exploration success and an entrepreneurial corporate culture that allowed it to move quickly into new areas, where bigger companies were slower to act.
The quality of BG’s assets, and more recently its weakening share price, had long made it a prime candidate for takeover, bankers and analysts said. Shell seized the opportunity last April after oil prices fell some 50%.
This Friday, Feb. 12, is BG’s last trading day.
“BG was a small and very successful business,” said Chris Wheaton, a portfolio manager at Allianz Global Investors, which holds BG and Shell stock. “It became very cash generative and then became a victim of its own success.”
Analysts have said BG’s gas assets will help transform Shell into one of the world’s largest LNG producers. With BG’s deep water Brazilian oil fields, the Anglo-Dutch giant will revive its sagging resource base, under pressure from the latest drop in oil prices.
Shell bought a company that had been a good bet for shareholders. Since 1990, its share price has risen over 800%, compared with an increase in Shell’s stock of around 165% and a rise of some 200% in the FTSE’s oil and gas index. BG’s shares first floated in London in 1986 at 63 pence.
“BG has been an amazing creation of value,” said Ivor Pether, a fund manager at U.K.-based Royal London Asset Management and investor in BG and Shell. “They were very successful at exploration and were one of the first companies to globalize their LNG opportunities,” he added.
Wood Mackenzie expects the global LNG market to expand by 50% from now until 2020, despite a current oversupply of LNG, as environmental regulations against more polluting fuels like coal and oil prompt a switch into cleaner burning natural gas.
BG’s roots were in LNG.
In the mid-1950s, a decade before North Sea gas was discovered, BG’s forerunner–Britain’s state-owned Gas Council–began looking at importing LNG as a fuel source for the energy-starved country. In 1959, it delivered the first international transportation of the fuel from Lake Charles, in the U.S., to Britain’s Canvey Island.
It was a stormy 23-day voyage on the converted naval vessel, but the experiment worked, paving the way for the world’s first LNG export scheme–a 15-year contract with Algeria to supply just under 1 million tons a year to the U.K. using two British-built LNG tankers.
BG’s then Chief Executive Frank Chapman saw an opportunity to increase its LNG business with shipments to the U.S. in the early 2000s. The company leased tankers and purchasing capacity at the very same Lake Charles facility from which they had brought a cargo to the U.K. some 40 years earlier.
“I remember convincing our board wasn’t straightforward,” Mr. Chapman said in a 2012 speech.
The company built up a portfolio of long-term contracts and short-term LNG cargoes. It diverted shipments to the highest paying markets, such as those in Asia, where it could charge a high spot price, while also fulfilling longer-term contracts elsewhere.
“A complete shift in the LNG paradigm,” Mr. Chapman called it in his speech.
BG now has around 30 LNG ships on the water at any one time and delivered 282 cargoes of LNG in 2015, more than double the previous year.
The company grew, picking up assets in Egypt, Trinidad and Tobago, Kazakhstan and the U.S. It also benefited from being an early mover into Brazil, making a set of blockbuster exploration successes offshore between 2006 and 2009.
Its production increased from about 300,000 barrels of oil equivalent a day in 2001 to 704,000 boe/day in 2015.
The company’s successes came with challenges.
BG got bogged down in complex projects and failed to meet its own deadlines and production targets. Costs overran in Australia and profits were downgraded. It took big write downs as U.S. gas prices crumbled.
By the time Mr. Chapman left at the end of 2012, the company’s share price was down around 30% from the beginning of the year.
A period of turmoil followed. The next CEO Chris Finlayson stepped down after just 16 months, leaving a gap of almost a year before a new chief, Helge Lund, took over. BG’s share price fell around a third in 2014.
Just weeks after Mr. Lund started at the company in February 2015, Shell moved in with its offer for BG. (WSJ)