Shells(LSE: RDSB) merger with BG Group will create a Footsie titan. The enlarged group will make up around 10% of the index, andprovide 10% of the indexs dividends.
And at present levels the company supports a dividend yield of 6.2%, a yield thats hard to turn down.
However, some analysts have begun to voice their concerns about the sustainability of Shells dividend payout after it acquires BG. Should dividend investors be worried?
The success or failure of Shells multi-billion dollar purchase of BGhinges on long-term oil price assumptions.
For example, if the price of oil returns to $90/bbl then the deal will yield terrific results for Shell and the companys shareholders. If the price of oil rises to $70/bbl, the deal becomes manageable. Nevertheless, if the price of oil continues to languish at around $50/bbl then this deal could come back to haunt Shell.
You see, the crowning jewels in BGs empire are the companys oil & gas assets in Brazil. When combined, BG and Shell will bethe largest foreign oil company in oil-rich Brazil, although most of BGs Brazilian assets arent profitable with oil trading at $50/bbl.
But Shells analysts believe that the price of oil will recover to $90/bbl, which is why the company has decided to do this deal now. Based on these assumptions, analysts believe that the deal will bestrongly earnings-accretive from 2018 and the dividend will be safe.
Balance sheet risk
Concerns have also been raised about the state of Shells balance sheet after this deal completes. Indeed, Shell is paying a 50% premium for its smaller peer, a total of 55bn including debt. Many analysts have stated that this slug of debt will put pressure on Shells balance sheet.
That being said, Shells management has stated that the company is planning to shed around $30bn of asset over the next few years to help fund the deal. Private equity buyers are already swarming around the company for its unwanted assets, so hitting the $30bn target shouldnt be an issue.
Additionally, Shell believes that it can deliver $2.5bn in annual savings once the deal completes. These savings should only improve the enlarged companysfinancial flexibility.
How safe is that dividend?
So, is Shells prized dividend at risk following the BG deal?
Well, it really depends on the price of oil. If oil returns to $90/bbl then the dividend will be safe, but oil remains depressed then Shell might have to rethink its dividend policy.
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