Shell Seen as Best Oil Major Wager by Analysts After BG Deal

  • Analysts estimate Shell shares will rise 12.2% over 12 months
  • Company has most buy recommendations among 9 biggest producers

Ben Van Beurden staked his reputation on Royal Dutch Shell Plc’s $53 billion acquisition of BG Group Plc as crude slumped. Analysts are rewarding the chief executive officer by putting the enlarged company in pole position to exploit a market upturn. 

Shell’s shares will rise about 12.2 percent in the next 12 months, the most among the world’s six biggest non-state oil companies, according to the target prices of analysts compiled by Bloomberg. More than 65 percent of analysts who cover Europe’s largest oil producer recommend buying the stock, the highest share among its peers.

When the drop in crude to a 12-year low convinced some investors that Shell was paying too much for BG, Van Beurden pressed on, reiterating the appeal of high-margin assets from Australia to Brazil. With oil climbing about 40 percent from its January lows, Shell is helping to turn around an energy sector that was the worst performer on the MSCI World Index for the past two years.

“Shell is among the most well-placed to benefit when oil rebounds, while it gains from improved cash flows when oil stays low,” Brendan Warn, a managing director at BMO Capital Markets in London, said by phone. “There’s also more trading confidence on oil prices and that helps the entire industry.”

Peer Comparisons

Shell’s predicted share-price increase over the next year leads Eni SpA’s 11 percent advance, Chevron Corp.’s 7.9 percent gain and Total SA’s 7.1 percent, analyst estimates show. Shell’s projected gain is in addition to the 9 percent advance in its stock so far this year.

After using more than $10 billion of cash to pay for the acquisition, Shell’s gearing, a measure of its net debt to equity, will rise to “low-20 percent” from about 14 percent at the end of 2015, Chief Financial Officer Simon Henry said last month. It’s U.K. peer BP Plc had a ratio of 21.6 percent at the end of December, an increase of almost 5 percentage points from a year earlier.

“Shell’s balance sheet is safe even after the acquisition as we can see from the gearing levels,” said Alexandre Andlauer, an oil analyst at AlphaValue SAS in Paris. “There’s been a lot of cost cutting already, and they’ll probably find more synergies from the BG deal than they have announced.”

Operational Synergies

The company has announced it will realize $3.5 billion in operational synergies from BG. The deal also gives Shell high-margin production in Brazil and Australia and gas assets in Kazakhstan, Trinidad and Tanzania. 

The change in outlook for comes after The Hague-based company took a beating in the past year. It reported an 53 percent decline in adjusted net income, wrote down more than $8 billion of assets and dismissed thousands of employees.

Shell’s shares also dropped about twice as much as Exxon Mobil Corp. Even if the stock climbs to the 12-month target price of 1,863.25 pence predicted by analysts, that would still be about 24 percent below the record high of September 2014.

While the BG deal will make Shell double the size of its nearest rival in liquefied natural gas production, that could prove a drag on earnings as LNG prices typically follow oil with a few months’ lag, according to BMO’s Warn. The price of LNG for short-term deliveries to Northeast Asia, where the biggest importers are located, has sunk more than 44 percent in the past year to the lowest since data started in 2010, according to assessments by New York-based World Gas Intelligence.

Still, the acquisition eases pressure on Shell to spend money on exploration to replenish reserves should oil prices stay low. Van Beurden, 57, who took over as CEO in January 2014, will be keeping an eye on the market recovery over the past five weeks, after a similar rebound in the early months of 2015 was followed by a collapse to below $28 a barrel.

Brent, currently trading just above $40 a barrel, will drop to $30 in the second quarter of this year, UBS Group AG analyst Giovanni Staunovo said on Tuesday. Goldman Sachs Group Inc. reiterated oil will fluctuate between $20 to $40 a barrel.

Shell, which will update investors on the integration of BG when it announces first-quarter earnings in May, has said the deal will help it maintain its dividend payouts and add to cash at any oil price.

“The momentum is with Shell now and that will continue this year,” Andlauer said by phone. “They’ve done a lot of cost-cutting and portfolio management and analysts and investors like that.”

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