Buy Shell: 50% Upside To The End Of 2016
I think the cash-and-stock offer for BG whose stock now trades aroundfair valuein light of Shells share price weakness following the deals announcement offers Shell a unique opportunity to grow earnings and become a more solid dividend play over the long term.
Shell is a strong buy right now, in my view.As you mightimagine, there are risks, of course.Shells stock has lost some value in the last few days asthe oil behemoth has clearly fully valued BG, but its strategy is wise. In fact, the possibility that other suitors would sneak in to secure BG assets seems very unlikely at present.
The press speculates that the new company will face several regulatory hurdlesaround the world, with somepundits suggesting that prolonged oil price weakness could harm shareholder value.
Thats just talk, Id argue.
It is not easy for the management team it never is in transformational deals but Shell will be better off strategically, economically and financially after BG is fully integrated. The deal boosts the combined entitys position in theglobal LNG market, with a15% market share, and there are many other elements I like.
Hold Shell: Only 25% Upside
The most obvious risk in this 47bn deal is execution.
On the one hand, at 383p the cash component of the offer is rather low and may not have pleased all BG shareholders, who could be asking for more over time or simply decide to put pressure on management. On the other, the stock component may be considered too high by Shell shareholders, who similarly could behave erratically if thing do not go according to plan.
These deals are never easy to pull off, and once they are done, market scrutiny can also become a big problem for senior executives. Big mergers and acquisitions are more likely to destroy value than to reward shareholders, history shows.
The deal is expected to deliver meaningful synergies, and there remains a possibility that capital expenditure projections will be tweaked down, enhancing the dividend policy of the combined entity, which is also planning to buy back lots of its own stock between 2017 and 2020.
Itd hard to say right now whether these targets will be met right, and continuity in management will be important but these risks can be overcome.
The deal will not be accretive to earnings until 2017 at the earliest but, should execution be flawless, itd become strongly accretive from 2018, according to realistic oil price assumptions over the next five years.
Sell Shell 15% Downside
Shells closing price on 7 April, the day before the deal was announced, implied anoffer worth 1,365p for each BG share.BG currently trades at around 1,163p, and that reflects a drop in the share price of Shell, which has lost almost 10% of value since the deal was announced.
Will Shell continue to fall?
Well, the transaction is expected to be completed in early 2016, and this is an obvious risk one likely to determine short-term volatility in Shells stock price.Aside from that, however, I dont expect much turbulence unless, of course, oil prices drop to $20 a barrel and stay there for a long time but even then, the combined entity may be able to withstand the storm.
Shares such as those of Shell or BP must be held now byinvestors looking for long-term value at a decent price, and that’s particularly true when you consider the income associated to these companies’ payout policies.But if you are after higher gains and solid income from less cyclical stocks,you must learn moreabout a few defensive businessesthatcould really surprise you over the short and long term.
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