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Shell cuts 2016 spending by US$2b as it prepares for BG

Shareholders of Royal Dutch Shell approved the company's US$49 billion takeover of smaller rival BG Group at a special stakeholder meeting in The Hague on Wednesday.

[LONDON] Royal Dutch Shell Plc, Europe's largest oil company, further reduced spending plans for this year and 2016 as it prepares to take over BG Group Plc amid slumping prices for crude.

The combined company plans US$33 billion of capital spending next year, lower than Shell's previous guidance of US$35 billion, it said Tuesday. Shell also cut its spending forecast for this year by US$1 billion to US$29 billion.

Crude's collapse to less than US$37 a barrel from about US$55 on the day the deal was announced in April has prompted some investors to question whether Shell is paying too much. The oil producer has justified the deal by saying that it boosts its ability to maintain dividends, makes it the world's biggest liquefied natural gas company and gives it oil and gas assets from Australia to Brazil.

"The two companies are combining during a low oil-price environment and cutting their spending plans makes a lot of sense," said Jason Gammel, a London-based analyst with Jefferies International Ltd. "This moves the plans for the deal forward." Shell expects operating costs to fall by US$4 billion this year, about 10 per cent lower than last year, and by US$3 billion in 2016. The acquisition will break even with Brent crude prices in the low US$60s and add to operating cash flow per share at US$50 a barrel in 2016, the company said in a statement. It expects the deal to be accretive to earnings per share, excluding identified items, in 2017 at US$65 Brent.

Shell's B shares, the class of stock used in the deal, rose 2.9 per cent to 1,536 pence at 9:51 a.m. in London, adding to Tuesday's 2.9 per cent increase. BG gained 3.3 per cent to 960.7 pence, also rising for a second day.

Shell in April offered to pay 0.4454 of its B shares and 383 pence in cash for each BG share in a deal valued at US$70 billion. A decline in Shell's stock has cut that to about US$53 billion as of Dec 18, the company said in the statement.  Shell's shareholders are scheduled to vote on the acquisition on Jan 27 and BG's the next day. Shell requires the backing of 50 per cent of its holders. In BG's case, votes in favour must represent at least 75 per cent of the total value of BG shares. The merger is likely to become effective Feb 15, Shell said.