Why BG May Be Best Way To Play Shell Acquisition

• BG Group plc (ADR) BRGYY shares are down 16 percent in the last six months, and are trading near the midpoint of their 52-week range of $11.99 - $18.81.
• RBC Capital Markets’ Biraj Borkhataria upgraded the rating on the company from Sector Perform to Outperform, while maintaining the price target at GBp 1,275.
• The acquisition of the company by Royal Dutch Shell plc (ADR) (NYSE: RDS-A) is expected to close successfully, Borkhataria mentioned.

Analyst Biraj Borkhataria wrote, “Given the interconnected conflict between Australia and China’s view on Shell acquiring BG, and the fact that the decision on approval could have been politically driven, we had previously preferred Shell on a risk-adjusted basis.”

The ACCC has now approved the deal, which was considered by the analyst as “the most contentious of the five pre-conditions.” Moreover, the spread has remained wide. These two factors support the upgrade in rating, Borkhataria said, while adding that BG is now “our preferred route into Shell.”

Out of the five main areas that Shell had highlighted as pre-conditions, approval has been received from the EU, Brazil and the ACCC. The remaining approvals requires are from Australia’s Foreign Investment Review Board and China’s MOFCOM.

“Overall, we see the regulatory hurdles as manageable, and expect the deal to close in early 2016, in line with management guidance,” Borkhataria commented.

The RBC Capital Markets report noted that Brazil is the key and clear value driver for Shell. BG’s Brazil volumes hit an all-time high of 158kboed in Q3, representing a 100 percent jump from the 81kboed produced in 2014, and four times the level two years ago. Borkhataria expects production to reach 450kboed by 2020.