The Qatar Investment Authority amassed major positions
in both Royal Dutch Shell and BG Group after the two companies
agreed to merge earlier this month. What’s its
The oil and gas industry is primed for an M&A boom. And on
Dutch Shell announced it was offering to buy Reading,
U.K.-based BG Group, the former exploration and
production arm of British Gas, in a deal worth £47
billion ($70.2 billion). Among the biggest recent takeovers,
the deal would create an energy giant with an estimated market
value of $300 billion. The news led to a flurry of activity.
Rumors about other suspected takeover targets in the energy
Sovereign wealth funds’ responses to the
proposed deal in the week following the announcement were
largely ignored by the media. Norges Bank Investment Management, the arm
of Norway’s central bank that manages the $861
billion Government Pension Fund Global, added BG
shares to its portfolio, which also includes a 5 percent stake
in Shell. China’s State Administration of Foreign Exchange,
an arm of the People’s Bank of China that has
about $500 billion under its belt to invest in non-treasury
assets, played the markets to very modestly cut its stake at a
profit after BG’s share price jumped.
But these transactions paled in comparison to a huge play by
Qatar Investment Authority (QIA), which has an estimated
$304 billion in assets under management. Filings to the London
Stock Exchange in the days following the takeover suggest that
the Qatari fund bought 67 million shares in Shell (a 2.75
percent stake) and 12 million in BG (a 0.39 percent stake) in
the wake of the deal. The total cost? $2.3 billion —
big money even for the Qataris. QIA has had a busy 2015 to
date, completing multi-billion dollar deals for 8 Canada Square
and the wider Canary Wharf financial district.
QIA, which is among the most opaque of the major sovereign
wealth funds, is clearly bullish on the Shell-BG merger.
Whether it’s wise for a state-owned investor from
a hydrocarbon-dependent economy to pour such sums into oil and
gas is another matter.
The consensus is that Shell overpaid. "It was an extremely
generous valuation," says Rob West, London-based analyst at
Redburn Partners, a brokerage firm, who says the
deal’s $70 billion price tag assumes $95 a barrel
Brent crude: more than $30 above recent prices. The market
seems to agree; Shell’s shares tumbled on the day
of the announcement, closing at £20.84 per share, down 5
percent on April 7. BG shares were up 40 percent, at
In a research note dated April 9, sector director Stephen
Simko of Morningstar, the Chicago-based financial publisher,
wrote that the deal was a "pricey acquisition," pointing out
that Shell, based in the Hague, paid 11 percent more than the
firm’s "fair value" estimate and 52 percent above
where BG’s shares were trading on April 7. The
deal, Simko wrote, is "at best fair… unless long-term
oil prices trend well above our $75 Brent [crude] midcycle
Aside from the price, there may be issues with the logistics
of the deal. Multi-billion dollar mergers of this type
inevitably involve disruption and bring significant
organizational risk and uncertainty. Shell has said it will
make some $30 billion of asset sales over the next month to
fund the takeover, but has not yet decided on specific
divestments. Neither have regulators granted approval. QIA
initially appeared to have taken steps to hedge against any
problems, buying put options on BG shares on April 15 at
exercise prices ranging from £10.80 per share to
£11.30 per share, well above where they traded before
rumors of the deal surfaced. These options would have enabled
QIA to sell shares at those prices, and mitigate any potential
losses, if the takeover failed and BG’s shares
plunged. In the event, the fund soon unwound those positions,
indicating its bullish stance on BG.
Why did QIA wager such a large sum on the merger? The fund
may have been taking the long view, betting that the
acquisition of BG will enable Shell to restructure its
languishing portfolio to achieve higher growth over the coming
years. Sound enough reasoning.
Indeed, Pascal Menges, who manages a global energy fund at
Geneva-based financial services firm Lombard Odier, says the
takeover "makes a lot of sense" for Shell, despite the price.
"Over the last decade Shell and the other large integrated oil
and gas companies were generally behind the curve when it came
to investing in high-cost projects — they were late to
the party in investing in shale resources in the US, for
Menges is upbeat on the proposed merger. "In buying BG,
Shell has been more pro-active," he says. "The deal gives them
a nice pipeline of projects and enables them to delay the
execution of more expensive developments until prices rise and
they become more feasible."
He also points to some choice assets in BG’s
portfolio. The company owns a stake in what are believed to be
vast oil reserves offshore Brazil, for instance, which may pay
rich dividends, so long as the corruption scandal currently
engulfing Brazilian oil company Petrobas does not hold up the development
process for too long.
BG’s Brazilian oilfields are likely to be
highly productive and relatively inexpensive. The company
expects its Santos basin project to yield 1.5 million barrels
per day once it comes online between 2016 and 2018. It will
have a break-even price of only $40 a barrel, so it is likely
to be profitable even if the price of crude continues to
Potentially as important, BG owns natural gas assets, with
stakes in Australia’s Queensland-Curtis LNG, a
pioneering project to turn gas trapped in coal seams into
liquid natural gas (LNG), and a share in the massive recent offshore gas finds in Tanzania and Kenya.
These will be combined with Shell’s own resource
assets and its facilities for producing LNG — many of
which are located in Qatar, where the company has built up a major presence in recent years.
Accordingly, the merger could create a global LNG behemoth.
Redburn’s West says that may be the real reason
behind QIA’s purchases.
"With this deal you’re generating what will be
the largest LNG marketing entity on the planet, with around 67
million tons of total LNG sales capacity by the time the
existing project pipeline is completed," West says. "Qatar is
the biggest LNG exporter in the industry and
they’ll be looking for a way to get access to that
market, so it makes sense to seek for a linkage there. It
certainly looks like Qatar has seen value in that LNG marketing
QIA’s $2.3 billion investment looks like an
element of the strategic shift signaled by Tamim bin-Hamad
bin-Khalifa al-Thani, who acceded as Qatar’s emir
following the abdication of his father in June 2013. The new
leader was clear that he wanted to focus on putting
Qatar’s great hydrocarbon wealth to work in the
domestic economy, instead of using QIA to promote the
emirate’s reputation abroad.
While QIA has not stopped hoovering up international assets,
its support for a big LNG business with strong domestic ties
makes sense given Qatar’s reliance on gas exports.
Qatar is the world’s second-biggest exporter of
LNG, after Russia, and LNG sales account for more than 50
percent of the emirate’s GDP.
What lies ahead for QIA? Having shown willingness to spend
on oil and gas businesses in the face of volatile energy
prices, the fund will likely be closely monitoring similar
opportunities. Indeed, its investments in BG and Shell may
suggest the fund is tactically positioning itself to profit
from a potential surge in M&A activity across the
Speculation is rife that the Shell-BG deal will kickstart a
wave of activity akin to the flurry of mergers in the early
1980s and late 1990s which contributed to the creation of
today’s hydrocarbon leviathans. BP, San Ramon,
California-based Chevron Corp., and Irving, Texas-based
ExxonMobil continue to dominate the global energy industry.
The Shell-BG deal is certainly no one-off. Houston-based
oil-field services provider Halliburton is buying its smaller
rival Baker Hughes for $37.2 billion. Roy Behren, a managing
member at Valhalla, New York-based asset manager Westchester
Capital, which specializes in M&A, says there will be more
acquisitions. "We expect [M&A activity] to pick up at
current oil and gas prices," he says, citing ExxonMobil and
Houston-based ConocoPhilips as two oil majors with the "deep
pockets" required for such deals.
QIA may be interested in one other integrated oil and gas
company — France’s oil major Total, of
which it owns around 3 percent. Redburn’s West
says that, like Shell, Total faces challenges with its pipeline
of projects that will stunt its ability to grow organically and
force it to become more acquisitive to accelerate production
What’s more, like Shell and London-based BP,
Total has a presence in the Qatari natural gas sector. It is
part of the Qatargas consortium that operates four LNG projects
across the emirate. If Total does decide to make a move for a
smaller rival, it seems probable that QIA would buy shares.
For now, however, we have only QIA’s mammoth
bet on the BG-Shell merger, which seems to reflect both
commercial and strategic imperatives. Whether it pays off will
depend on the hydrocarbons and the price the world is willing
to pay for them.