UK equity income investors have been put on alert after Royal Dutch Shell’s bid to buy rival oil and gas firm BG Group as experts warned the deal could affect Shell’s dividends.
Last week, the Anglo-Dutch group announced a blockbuster £47bn bid to buy BG Group. If successful, the combined group would challenge ExxonMobil to be the largest oil and gas producer in the world.
While some experts hailed the “transformational” scope of the plan, alarms were raised about Shell’s ability to grow and pay its dividend, given the expense of the deal.
Shell has proposed offering BG Group shareholders equivalent shares in Shell, so that just over a quarter of the cost would be settled in cash.
But equity managers pointed out it could still struggle with its cash position as it labours to pay off the £8bn net debt currently on BG’s books.
Matthew Beesley, head of global equities at Henderson Global Investors, said if the deal – one of the largest in corporate history – goes through, then Shell’s “balance sheet will become more stretched”.
He added: “This potentially puts some strain on the dividend as they redirect cashflows to paying down debt ahead of growing the dividend.”
After announcing its bid to buy BG, Shell maintained the deal would not change its dividend plan of paying out $1.88 per share for 2015. It said it would pay “at least that amount” again in 2016.
Some managers had previously expressed concerns about the ability of oil majors to sustain their payouts with the oil price under $60 a barrel. The huge capital expenditure on BG will increase those fears.
According to analysts at Canaccord Genuity, Shell had assumed a medium-term oil price of $90 per barrel in calculating whether it should buy BG and how much it should pay. It follows that the firm might struggle if oil does not return to that level.
Mr Beesley said the potential travails of Shell should be a concern to UK equity income investors, especially pension savers, because the firm currently accounts for “nearly 10 per cent of UK-related dividend income”, which could rise to 11 per cent after the BG deal.
Pascal Menges, manager of the Lombard Odier Global Energy fund, said “the risk of indigestion [on the deal] is not small”.
He warned Shell’s management had a big challenge on its hands to execute the deal and “generate synergies and assets sales” to justify the initial cost of the purchase.
Shell’s share price fell by 5.5 per cent on the day the deal was announced as investors reacted nervously.
But Michael Clark, portfolio manager of the Fidelity MoneyBuilder Dividend fund, which owns both companies, insisted: “There is no danger that Shell will change its dividend policy.”
Mr Clark said the deal would be positive for Shell’s shareholders due to the increased production reserves and access to BG’s “first-class assets”.
