The Shell-BG Deal: Traces to Oil Market Low Positions

Oil companies have a knack for picking the bottom in crude prices, and history may be about to repeat itself.

Traders and analysts are speculating that Royal Dutch Shell Plc’s takeover of BG Group Plc for $70 billion announced Wednesday may be the first in a wave of acquisitions as Big Oil seeks to drive out costs following the rout in oil.

That happening would resemble the massive deals of the late 1990s that restructured the industry. As oil slid then, BP Plc bought Amoco Corp. for $56 billion in August 1998 and Exxon took over Mobil Corp. for $80 billion in December. Both were announced just weeks before Brent crude reached its trough of $9.55 a barrel. As the market began to recover, Spain’s Repsol SA acquired YPF of Argentina for some $15 billion and Total SA of France bought Elf Aquitaine for $52 billion. Chevron later scooped up Texaco Inc. and Conoco took out Phillips.

In the late 1990s, as now, producers were battling for market share, pumping at will to force out the most inefficient drillers, sending crude down about 50 percent in 14 months. The process of driving out the weak has begun to happen now, with the U.S. rig count plummeting almost in half in just four months and signaling a decline in supply -- and higher prices -- may be ahead.

Shell “could have waited for the oil price to fall to $40 but if you look from a long-term perspective it is neither here nor there,” said Harry Tchilinguirian, BNP Paribas SA’s London-based head of commodity markets strategy. “If you think that oil is going to $100 then these assets are undervalued.”

Stronger Position

The deal is much more than a simple bet on higher commodity prices, he said, because it allows Shell to cut costs while also gaining a stronger position in global natural-gas markets, which are expected to grow more quickly than oil.

Shell itself said the deal is predicated on higher prices. The company said the price assumes Brent in 2016 at $67 a barrel, at $75 in 2017 then $90 a barrel through 2020, according to a statement Wednesday.

Those forecasts are consistent with the Wall Street consensus, with the 2016 median at $70 and then $75 in 2018, according to data compiled by Bloomberg.

Not everyone thinks oil is heading higher, and the industry’s record isn’t perfect. The biggest deals of the 1980s -- DuPont buying Conoco, a takeover of Gulf Oil by what became Chevron and U.S. Steel’s bid for Marathon Oil -- occurred before the crash of 1986.