Going, going, BGone

Four days ago, on 7th April, BG CEO Helge Lund – who had joined the company only in February – outlined his strategy for the company:

Lund acknowledged that BG had sustained “operational setbacks” over the past two years, having been hit by lower liquefied natural gas exports from Egypt and construction challenges and cost overruns on its Queensland Curtis LNG (QCLNG) project in Australia.

He said “we must take account of the lessons learned from these experiences as we develop our long-term plans”.

Lund said the recent oil price drop has “changed the dynamics” of the industry and cautioned “the future operating environment is challenging, volatile and hard to predict”.

After presiding over drastic cutbacks at Statoil, the BG supremo signalled he intends to pursue a similar cost-cutting course in his new domain as well as further optimise the company’s asset portfolio following the sale of $6.6 billion worth of non-core assets last year.

Lund pledged to give his full attention “to improving our efficiency [and] tightening both our operating costs and capital expenditure, including our exploration spend”.

Furthermore, the company would “continue to develop and optimise our LNG supply portfolio” after recently bringing online the QCLNG project.

BG has pledged to cut capital expenditure this year to between $6 billion and $7 billion, compared with $9.4 billion in 2014, as it adapts to a lower oil price environment.

He could have saved a lot of time and ink by outlining the actual company strategy, as follows:

Tomorrow we will announce that Shell is buying us out and I will depart shortly thereafter £29m to the good.  Ta-da, folks!”

Lund’s appointment was not without controversy even before he’d arrived at BG: a shareholder revolt over his £14m proposed salary (more than ten times what he made in his previous role as Statoil’s CEO) resulted in it being reduced in a deal which was thought to be worth £4.7m.  That he is now looking to walk away with 6 times that amount (and more than his accumulated salary from his 10 years at Staoil) after less than 3 months in the job is unsurprisingly causing those earlier arguments to be revived.

I am curious as to the timing here.  Lund started his role in BG a month earlier than intended.  I don’t know how long it takes a company like Shell to decide to buy a company like BG, but given it takes the Anglo-Dutch outfit 6 weeks to compile a vague and guarded reply to a simple HR query we can probably conclude that these things take time.  Shell confessed to their eyeing several targets for acquisition, but it would be surprising if the move for BG was not already well in motion internally before Lund took the reins.  Did he have any inkling?  Coming from a position as the CEO of Statoil he would surely have had plenty of contacts in industry and various financial institutions that could have given him a nudge.  Or perhaps he really did stumble by pure luck into what must rank among the highest day-rate contracts in the history of the oil industry?  I expect his current focus will be on how to keep this windfall out of the hands of the Norwegian tax authorities: he probably hasn’t even had time to pack up his old house.

“Så lenge, drittsekker!”

With Lund heading for a rosy retirement or a cushy role somewhere else, spare a thought for poor Chris Finlayson, Lund’s predecessor at BG. He quit BG in April 2014 after only 16 months in charge with a mere £1.3m in notice payments and pension entitlements – the minimum required under his contract.  The irony is that Finlayson had spent 30 years in Shell before being hired by BG; the company he quit Shell to lead is now becoming part of his old mob.  Had he hung on a bit longer he could have pocketted an awful lot of cash plus, possibly, got his old office back.

“Bollocks!”

The other irony is that Finlayson’s perceived failings as CEO of BG coupled with the mismanagement over Lund’s pay likely contributed to the company becoming a target for takeover in the first place.  Certainly, the sudden departure of a recently hired CEO and shareholder revolts would have done little to help BG if it were already being eyed by a larger predator.

The actual reasons for Shell’s purchase of BG are fairly obvious: the takeover will make them the dominant private gas player (particularly in LNG) but also allows them to expand their footprint in Brazil.  I suspect the latter may be the juicier of the two, mainly because Brazil’s pre-salt developments are probably the largest recognised growth area in the world and with the acquisition of BG’s assets Shell will be the leading foreign oil company in the country.  With Brazil’s entire oil industry bogged down in the colossal Petrobras corruption scandal, Shell will be very well positioned to advertise itself as the solution to move projects forward within a structure of transparency, sound corporate governance, and if necessary, with western financing.

I am of the opinion that it is the Brazilian assets that attracted Shell more than the troubled Curtis LNG plant in Australia.  Although there are obvious synergies, such as the possibility of sending gas originally intended for the cancelled Arrow LNG facility to Curtis, I see this more as a second-tier consideration when embarking on a takeover of this magnitude.  That’s not to say that the Australians are not now worried that their domestic operators – notable Santos – will be swallowed up in similar takeovers.

The Economist believes that this deal was more about gas than oil, and taken as a whole they might be right.  They are also saying much the same as everyone else in predicting that this takeover will spark similar actions by Chevron and ExxonMobil, possibly involving a buyout of BP, with Tullow also being mentioned.  But what really stood out for me in the article was its two concluding paragraphs:

The fall in the oil price has highlighted weakness of big companies which place big, long-term bets on difficult production and exploration projects. When times were good they excited their engineers with the technical challenges, and boosted their executives’ egos with ever-bigger balance sheets. Now they are now dealing with rising debts—up $31 billion this year for the main American and European energy companies—and falling share prices, down by a sixth since last summer. They are selling assets into a buyers’ market.

Behind the Shell-BG deal, and the speculation of more mergers to come, is a fundamental shift in the energy industry. Contrary to some expectations, the oil-price fall has not derailed the American shale boom. The small, flexible and innovative companies which specialise in horizontal drilling and hydraulic fracturing are proving better at cutting costs, raising productivity and adapting to market fluctuations than the lumbering giants who have long dominated the industry. Dinosaurs may mate, to ensure the survival of their species, but this is an age of mammals.

Indeed.  We’re still one supermajor too many.

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One Response to Going, going, BGone

  1. dearieme says:

    I thought that Helge Lund featured in the shipping forecast.