Months-long vicious oil trading has turned into a nightmare for the global oil and gas industry, compelling many firms to contemplate consolidation as a means to reduce costs and restore profits. After a long wait, another major deal in the space came in yesterday with Anglo-Dutch oil and gas company Royal Dutch Shell entering into a deal to acquire a smaller British gas producer BG Group plc for about 47 billion pounds ($70 billion) in cash and stock.
This is the second deal in the broad energy space following the slump in oil prices that started last summer. The first merger deal was announced in November when Halliburton ( HAL ) proposed to acquire Baker Hughes ( BHI ) for $34.6 billion in cash and stock. It is expected to close in the second half of 2015 (read: Will Halliburton-Baker Hughes Merger Drive Oil Service ETFs? ).
Shell-BG Deal in Focus
Under the terms of the deal, Shell will pay 383 pence ($5.70) in cash and 0.4454 Shell B shares for each share of BG Group. This represents a massive 50% premium over the BG share price as of April 7. With this, BG shareholders would own 19% of the combined company. The deal marks the oil and gas industry's mega-merger deal in more than a decade.
The proposed acquisition would further bolster Shell's position in its two leading areas - liquefied natural gas and deepwater drilling. Additionally, it would expand and solidify the company's presence in Brazil as the combined company is expected to boost production by tenfold to 550,000 barrels of oil and gas a day.
Further, the deal would boost Shell's proven oil and gas reserves by 25% and total production by 20%, as the company will gain control over BG's gas resources in East Africa, a large LNG gas project in Australia and the Santos Basin oil fields off the shore of Brazil. In terms of the financial aspect, the combined company will generate pre-tax synergies of approximately $2.5 billion per year until 2018.
The transaction, pending shareholder and regulatory approvals, is expected to close in the ongoing quarter. If approved, the combination would create the world's largest independent producer of liquefied natural gas. Moreover, the combined entity would be big enough to surpass Chevron ( CVX ) and will fetch market value twice the size of BP plc ( BP ). Notably, with the BG acquisition, it seems that Shell will come much closer to the world's largest publicly traded oil company, Exxon Mobil ( XOM ) challenging its dominance.
The Shell-BG deal seems to be paving way for more merger and acquisition activities in the industry, pushing big oils to consolidate once again. This is especially true as it reminds us of the situation back in 1998 when the slump in oil prices triggered a wave of deals following the first deal between BP plc and Amoco Corp (read: Oil ETFs Crushed in Friday's Trading ).
After the initial excitement settled down at the stock market, a mixed reaction to the deal was noted. Shares of BG Group surged as much as 44.2% in London Stock Exchange and 34% in OTC market on elevated volume. On the other hand, Royal Dutch Shell A shares ( RDS.A ) and B shares ( RDS.B ) fell 3.42% and 6%, respectively, at the close on the day.
This has put the energy ETF space in focus over the coming days, in particular those having a large allocation to the in-focus two firms. Below, we have highlighted these in detail. Investors should closely watch the movement in these funds in order to tap the advantage from the proposed deal. Investor should note that the funds were modestly down at the close of the session following the mega merger announcement.
If the merger turns out healthy, it could change the dynamics of the overall oil and gas industry, creating a good opportunity for these ETFs.
SPDR S&P International Energy Sector ETF ( IPW )
This fund provides exposure to the energy companies of developed markets excluding the U.S. by tracking the S&P Developed Ex-U.S. BMI Energy Sector Index. It is less popular and illiquid with AUM of $24.7 million and average daily volume of about 19,000 shares. The ETF charges 40 bps in fees per year from investors. In total, the fund holds about 139 securities in its basket. Of these firms, RDS.A and RDS.B occupies the third and fourth positions with a combined 17.7% share while BG Group takes the seventh spot at 4.2% share.
About 93% of the portfolio is allocated to oil gas and consumable fuels, and the rest to equipment & services. In terms of country exposure, United Kingdom and Canada take the largest share at 35.2% and 30.2%, respectively, while France also gets double-digit exposure at 11.8%. The product is down 1.2% in the year-to-date timeframe (read: 2015 Outlook for Oil & Gas ETFs ).
iShares MSCI Global Energy Producers ETF ( FILL )
This fund manages $32.2 million in its asset base and provides exposure to 214 global energy producer stocks by tracking the MSCI ACWI Select Energy Producers Investable Market Index. The product has an expense ratio of 0.39% and sees light volume of around 20,000 shares. Here, RDS.A and RDS.B make up for a combined 8.79% share in the basket and BG Group accounts for 2% of total assets. The three stocks are among the top 11 holdings.
North American firms dominate the fund's returns with over half of the portfolio, followed by Canada (9.1%) and the Netherlands (8.8%). From a sector look, the product is skewed toward oil and gas integrated with 61% share, and exploration and production with 30% share. The ETF has delivered flat returns so far this year.
iShares Global Energy ETF ( IXC )
This ETF follows the S&P Global 1200 Energy Sector Index, giving investors exposure to the 87 global energy stocks. Both RDS.A and RDS.B make up for the top 10 holdings with a combined 7.9% share while BG Group takes the thirteenth position at 1.8%. Here again, the oil, gas and consumable fuels sector dominates the fund's return with 89.1% share while U.S. firms make up for nearly three-fifths of the portfolio (see: all the Energy ETFs here ).
The fund is relatively popular and liquid with AUM of $1.1 billion and average daily volume of more than 287,000 shares. Expense ratio came in at 0.47%. It has lost 1.2% in the year-to-date timeframe.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.