Now that the dust has settled on the historic $70bn bid by Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) for BG Group (LSE: BG) (NASDAQOTH: BRGYY.US), I’ve taken another look at both stocks to see whether they deserve a buy rating.
The results might surprise you: I believe there is value in both companies, as I’ll explain.
1. Long-term Shell
Shell’s share price fell by up to 6% on the day the BG offer was announced, but it has since recovered and is now trading largely unchanged from its pre-offer price.
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To me, this suggests that after an initially cautious reaction, investors have assessed this potential deal more closely and realised that while it may be costly for Shell in the short term, oil and gas supermajors like Shell need to plan for decades ahead.
On this basis, acquiring BG’s reserves and becoming the global leader in liquefied natural gas (LNG) is likely to be a smart and profitable move for Shell.
2. Ditch BP, buy Shell
Shell’s offer for BG highlights the firm’s clear strategy for the future: LNG and deepwater oil, both of which offer the potential for long-term, large-scale profits.
However, while Shell is becoming larger and more focused, BP has been forced to get smaller to pay for the consequences of the Gulf of Mexico disaster, and appears to have no particular strategy to position itself for the future.
3. Buy BG instead of Shell?
BG shares currently trade at around 1,180p — about 11% below the current value of Shell’s offer.
By buying BG shares today and waiting for the offer to complete, which is expected to be early in 2016, you could make a low-risk profit simply by selling your Shell shares when you receive them, assuming Shell’s share price doesn’t fall too much in the meantime.
There’s also another option: if you are a long-term Shell shareholder and want to top up, buying BG shares could give you discounted Shell shares.
For example, if you bought £1,000 of BG shares today, and the deal goes through at today’s prices, you would end up with £325 in cash and Shell shares worth £800, making £1,125 in total — a 12.5% profit.
What’s more, buying Shell shares at a discount in this way means your dividend yield on cost, using this year’s dividend, would be a chunky 7% — you’d effectively have bought your Shell shares for about 1,800p!
If you already own BG or Shell shares, I’d suggest holding onto them: in either case, I believe future returns will justify your patience.
