Shell has been one of the major laggards among oil “supermajors.” Will the BG Group buyout finally be the jumpstart it needs?
The big news of late among energy stocks is that Royal Dutch Shell (NYSE: RDS-A) is forking out some $70 billion to buy up BG Group (OTC: BRGYY). Shell’s offer is a heck of premium – 50% higher than where BG was previously trading.
The BG buyout will make Shell the second largest oil company in the world, behind Exxon Mobil (NYSE: XOM). In fact, it’s the largest deal in the oil and gas industry since the Exxon and Mobil merger.
This could finally be a turning point for Shell. Recall that Shell was struggling even when oil prices were $100 a barrel, which comes after a number of big, unfruitful bets on shale plays.
But one of the big questions surrounding the BG buyout is what does it say about the current state of U.S. shale that Shell opted to buy an international player instead of a company in the fast growing shale market in the United States?
As mentioned, Shell has been burned with bets on shale before. The BG deal will boost Shell’s oil and gas reserves by over 25%, with the key being that it will give Shell a major boost in the liquefied natural gas (LNG) market.
My colleague Jonathan Yates highlighted why natural gas is so important for energy stocks, which is something Total SA (NYSE: TOT) is focusing on. Total is the Paris-based energy company that – like Shell and Exxon Mobil – is another major dividend payer, currently offering a 5.2% dividend yield .
In truth, Shell is making a bigger bet on faster growing international markets. As mentioned, BG Group will boost its natural gas presence, which comes as many countries are transitioning from coal to natural gas. It’s also undergoing a number of significant restructuring efforts after bringing in new CEO Ben van Beurden.
Shell is yielding an impressive 6.3%, which is the highest we’ve seen in nearly five years. And yet it has been one of the hardest hit energy stocks – shares are down nearly 10% year-to-date, which is one of the biggest declines of the major oil players.
It’s also one of the cheapest, trading at a price/earnings ratio of less than 11 based on next year’s earnings estimates. Going forward, Shell is planning to pay out $15 billion in dividends and buy back $25 billion worth of stock by 2020 – which would equate to nearly a third of its current market cap.
But, in truth, many of the oil and gas “supermajors” are enticing right now. I’ve talked about the benefits of biggest is best in oil.
The supermajors are a group that includes the world’s largest oil and gas companies, including the likes of BP PLC (NYSE: BP), Chevron (NYSE: CVX), Exxon Mobil, Shell and Total.
The two major U.S. oil and gas players are also offering yields that are tough to pass up. Chevron is yielding 4% and has upped its dividend for 29 straight years. Exxon Mobil offers a 3.2% dividend yield and has 32 consecutive years of dividend increases.
BP is interesting because it offers one of the highest dividends in the market, yielding an impressive 5.8%. BP is still trading well below where shares were priced before the Deepwater Horizon incident in 2010. But the company has been shifting vastly over the years, with the recent trend being its transition into a smaller, faster growing oil company. This includes selling off its refinery assets and essentially doubling down on heavy crude production in the U.S.
It remains to be seen whether the BG buyout is the start of the M&A boom much of the market has been waiting for in the oil and gas space.
But one thing remains: there are big dividends to be had among the oil supermajors. Right now, Shell appears to be one of the more interesting players.
Cheap Oil Here to Stay – For Now
Crude hasn’t been this cheap since March 11, 2009. And it’s likely to stay low for a while. OPEC refuses to cut production. And US production is expected to increase – not decrease – an additional 600,000 more barrels a day. The Saudis have played this one wrong – and you could profit from their blunder. Click here for all the details.