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RPT-Shell sees BG deal working with oil at $50 for two years - sources

Fri, 08th Jan 2016 09:00

(Repeats JAN 7 story, no change to text)

* Shell CFO, CEO hold talks with investors - sources

* CFO sees oil recovering to avg above $60/barrel-sources

* Investors expected to back BG deal despite downturn

* CFO says credit rating could be hit by deal - sources

By Ron Bousso and Emiliano Mellino

LONDON, Jan 7 (Reuters) - Royal Dutch Shell has toldinvestors its purchase of BG can work even if oil prices average$50 a barrel for two years, its lowest estimate to date as itseeks to secure shareholder support for the $51 billion dealamid plunging crude markets.

The Anglo-Dutch group is confident investors will back thedeal at a Jan. 27 meeting, even though crude prices arelanguishing near 12 year lows around $32 a barrel and it faces acut to its credit ratings due to higher debts, sources withknowledge of its meetings with analysts and investors said.

When Shell announced the deal in April 2015, withoil trading around $55 a barrel, many investors saw it as a boldmove to buy a weakened rival on the expectation that priceswould recover to around $90 per barrel within three years.

Initially, Shell indicated the combined group would beprofitable with prices in the mid $70s a barrel. Last month, itsaid the merger would work in the low $60s, as it identified newsynergies and cost cutting opportunities.

On Wednesday, finance chief Simon Henry told analysts Shellhad conducted stress tests that showed it could withstand oil at$50 a barrel over the next two years, the sources told Reuters.

A Reuters poll on Monday showed analysts expect benchmarkNorth Sea Brent crude futures to average $52.52 a barrel thisyear.

To weather such an environment, Shell plans to cut capitalspending further below the planned $35 billion for 2016, delayshare buybacks and extend scrip dividends, where investors areoffered discounted shares instead of cash, Henry told analysts.

Shell plans to keep the size of its dividend unchanged,however.

Henry also met this week in London with several of Shell'stop 10 investors, including BlackRock and Capital Group, seekingto address concerns about the deal.

Chief Executive Ben van Beurden is expected to meet otherleading investors in London on Friday and both he and Henry willhold phone briefings with U.S. investors next week, according tocompany sources.

The investors are being asked how they plan to vote on thedeal. Several so far have confirmed their support, but most haverefused to disclose their plans, according to the sources.

Despite weak oil prices, the deal is expected to win thebacking of a majority of Shell's shareholders.

"I would be very surprised if the deal didn't get thesupport of the Shell's shareholders. A 50 percent vote is verylikely to happen," one top investor told Reuters.

Ben Ritchie, senior investment manager at Aberdeen AssetManagement, a top ten investor in both Shell and BG, hadpreviously indicated his company would vote in favour of thedeal.

A Shell spokesman confirmed company executives had heldmeetings with top investors but would not comment on the contentof the discussions.

Shell shares fell 2.9 percent on Thursday, having slumpedmore than 30 percent since the deal was announced on April 8,trailing most of its peers.

LOWER RATING

In the analyst briefing, Henry said that although the oilmarket would take time to recover from its worst downturn inthree decades, prices would likely average at least $60 a barrelover the next 15 years, the long-term level at which Shell saysthe deal is profitable, according to sources at the briefing.

The chief financial officer (CFO) nevertheless acknowledgedthat the weaker outlook and larger debt Shell will assume tofinance the deal means credit rating agencies such as Standard &Poors (S&P) and Moody's will likely lower their ratings.

Lower credit ratings could make borrowing more expensive butare unlikely to significantly change access to debt markets.

S&P last July cut Shell's rating by one notch to 'AA minus'from 'AA' due to weaker oil prices, warning of possible adverseeffects on credit metrics due to the BG acquisition.

Shell has outlined plans to sell $30 billion of assets overthe next three years in order to finance the deal, but Henrysaid Shell was unlikely to achieve a third of that total thisyear due to low oil prices, the sources said. (Additional reporting by Emiliano Mellino; Editing by MarkPotter)

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