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Royal Dutch Shell plc (ADR) Downgrade Probable If BG Merger …

Royal Dutch Shell plc (ADR) (NYSE:RDS.A[1]) won approval from shareholders for its $50 billion acquisition of BG Group on Wednesday, followed by warning of an upcoming rating downgrade by Fitch Ratings.

Rating Downgrade On The Cards

Fitch currently rates Shell s debt profile as AA, along with a negative outlook, which implies a rating downgrade is on the cards. The negative outlook reflects the risk the BG deal presents to the rating in the current environment, Fitch recently said, adding that the deal will be positive for the company s business profile in the long term. Alex Griffiths, head of commodities EMEA at Fitch, said in an interview[2] on Bloomberg that he sees it as a short-term positive that the Shell-BG deal is mostly funded by equity financing. However, he pointed out that there is still a $20 billion cash price tag on the deal, which adds more stress to an already stressed leverage profile in the current market environment. Shell s credit rating could be downgraded by a notch or so if the acquisition completes, Mr. Griffiths said. Underlying the rating is the assumption that oil prices will average around $45 per barrel in 2016, as a fair amount of market tightening is expected later in the year.

Shell won approval from more than 83% of its investors, and BG Group, in the shareholder vote scheduled for today, needs support from 75% of its investors. It is highly likely the latter s shareholders will vote in favor of the deal

Production & Asset Sales

To provide the companies shareholders with the latest information regarding the fourth quarter and full year metrics, Shell and BG issued preliminary results last week. Performance of BG was outstanding with 704,000 barrels per day of oil production, soaring by 16% from the output of 2014. On the contrary, continued declines in outputs of Shell are likely to pursue undecided shareholders to support the merger, as it would be complementary to Shell s depleting reserves. Australian LNG project and Brazilian deep water projects reflect the strong growth potential of BG and thus, makes BG Group all the more attractive to Shell from the acquisition perspective. While the Shell-BG merger is highly probable to benefit Shell in the longer term, it could also require the company to meet certain execution targets. These largely constitute of $30 billion of asset sales in the year 2016 to 2018, in order to stable its books in the near term. According to Fitch, asset disposals are of high significance in Shell s decision to reduce the company s financial leverage after the merger.

References

  1. ^ NYSE:RDS.A (www.bidnessetc.com)
  2. ^ interview (www.bloomberg.com)



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