The chief executive of Shell has made a pretty bullish call on the price of oil just weeks before the company tries to complete its merger with BG Group in one of the biggest oil deals in history.
Speaking to the Sunday Times ahead of a shareholders vote on the proposed $51 billion (£35 billion) deal, Ben van Beurden said that he can’t see current oil prices lasting, and that he reckons things will pick up in the coming years (emphasis ours):
“The oil prices we are seeing today are not sustainable and are going to settle at higher levels,” he said, “and higher, in my mind, over the next few decades than the low $60s that we require to make this deal a good deal.“
This month could see Shell’s merger with BG Group finally go through as shareholders in both companies will be given the chance to have their say. The deal has already cleared all of the major hurdles when it comes to regulation, getting approval from Chinese authorities in mid-December.
But, Shell really needs to see a big rise in the price of oil for their acquisition of BG to make any financial sense. When the potential merger was first announced in April oil cost around $50 (£34.41) per barrel, which, while still a big slump from the $105 (£72.25) highs of summer 2014, is still nearly 35% higher than prices right now.
Last week the price of oil slipped to 14-year lows, with Brent crude losing 10% of its value in just a week. The slide has continued on Monday, and both major benchmarks saw losses of at least 2% falls in early trade.West Texas Intermediate (WTI) crude is now hovering just below $33 (£22.71) per barrel, while Brent crude is just above that mark.
Now that all the regulatory fences have been cleared, shareholders in the oil giants get to have their say on the deal, with votes being held on January 27 and 28. Opinion within the companies, and in the world of finance, is split massively. David Cumming, the head of equities at Standard Life, one of Shell’s top investors, has publicly said that the company won’t back the merger, calling the deal “value destructive.” However, others — including influential advisers ISS and Glass Lewis — have encouraged investors to approve the acquisition.
Betting against the consensus
Now obviously, in the run up to trying to gain shareholder approval for one of the highest profile takeovers in recent years, Shell’s chief executive is going to do everything he can to convince people it’s a good deal, but van Beurden’s comments are interesting nonetheless. Especially when you consider that so many people are betting that oil is going to continue its downwards slide.
Last week Shell’s finance director Simon Henry admitted that he fears oil will fall below $20 (£13.76), something echoed in a note from Morgan Stanley on Monday morning which suggested that Brent crude could fall to $20 per barrel thanks to the strong dollar, as first reported by Bloomberg. “Given the continued US dollar appreciation, $20-$25 (£13.76-17.20) oil price scenarios are possible simply due to currency,” analysts working on the note said.
It’s not just his own colleagues and Morgan Stanley who van Beurden is arguing against either. In November, Goldman Sachs stated that $20 oil could soon be a reality, and this was back when WTI was worth more than $45 (£31) per barrel.
Van Beurden’s bullishness doesn’t seem to have affected investors too much on Monday. At the time this article was first published, Shell’s A shares are up by 0.2%, while BG’s have fallen a little under 1% on the day.