Analysis of Shell Acquisition of BG Group: The Oil & Gas Industry During a Turbulent Time

Vi Dieu Nguyen Dang

Student thesis: Master thesis


The oil and gas industry is essential to the modern world, as the world relies on it to function - and this will be the case for many years to come according to forecasts. The world economy however has taken a hit over the last years, and it has taken the demand for oil and gas with it. The supply however has not slowed down, as the industry's know-how and technology has kept a steady progression through it all. This has left us in a situation with historically low oil and gas prices, which is driving the players on the market to battle it out in the art of cost cutting. Historically speaking this has often resulted in mergers and acquisitions, as the bigger companies will take over the smaller ones in an effort to cut costs and up their revenue. This, however, does not appear to be the case at the moment, as acquisitions is at an all-time low for the last 5 years, and only a few of the bigger companies are opting for this strategy. One of them being Shell, who has acquired BG Group. This thesis is examining, why Shell made this move, when seemingly only few others are taking this course of action and try to determine whether or not it was a good decision. This assessment is partly made through M&A theory, where I am analyzing the potential synergy effects. There are significant operating synergy effects to be gained within economies of scale, process improvements and revenue growth. The other part of the assessment is analyzing the acquisition offer by Shell of GBP 13.50 per BG Group Share. This is done by a valuation where the forecast is based on a strategic analysis. The analysis looks at the external macroeconomic environment, to explain what variables had an effect on the industry and on the oil price. Then the attractiveness of the industry is assessed, with the outcome that the rivalry among existing competitors is high. An internal analysis is also made to look at the value chain of BG Group and identify the activities that were value- adding and gave BG Group a competitive advantage. The valuation is made based on the DCF model, which discounts future free cash flows using the WACC to derive a net present value of the enterprise value. The valuation showed that the theoretical share price of BG Group should have been GBP 16.68, the day before the deal was announced. Therefore Shell paid less than the fair value, and therefore made a good deal with potential for additional synergy effects in the future.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2016
Number of pages94