Weekly Oil & Gas Notes: Petrobras Worker Strike Finally Ends, Complications Increase For Shell-BG Deal As Chinese Regulators Want Concessions

The Oil & Gas industry saw significant activity this week, with Petrobras announcing that the worker strike that was severely affecting its Brazilian operations has finally come to an end. The company claimed in a statement that most unions have approved the end of the strike. On a separate note, the Chinese authorities reviewing the proposed Royal Dutch Shell-BG Group merger are reportedly urging Royal Dutch Shell to dole out concessions on long-term liquefied natural gas (LNG) supply contracts with the country. After getting an all-clear from the Australian completion authority last week, Shell now needs clearance from China and Australia’s Foreign Investment Review Board for the deal to close as planned in early 2016. On that note, we discuss below these developments related to the Oil & Gas companies over the past few days.

Worker Strike At Petrobras Comes To An End

Petroleo Brasileiro Petrobras (NYSE:PBR) announced Monday that the worker strike that was severely affecting its Brazilian operations finally came to an end. ^[1] The company confirmed in a statement that most unions are on board now and have approved the end of the strike. The FUP federation of oil worker unions had earlier claimed that it had reached an agreement to end the strike after meeting with Petrobras Chief Executive Officer Aldemir Bendine. ^[2] However, the strike had lingered on as 7 out of 17 local unions had not accepted this agreement. The worker’s strike, which began on November 1 and ran for more than three weeks, is widely regarded as one of the most disruptive lockdowns in the past 20 years for Petrobras.

Petrobras claimed that the strike resulted in a loss of output of 2.29 million barrels of oil and 48.4 million cubic meters of natural gas. The company maintains that it will still be able to achieve its 2015 production target of 2.125 million barrels of oil per day in Brazil. However, there is a possibility that the worker strike’s negative impact on production was much higher. The picture will be clearer once the company releases its oil & gas production numbers for the month of November sometime next month. It will also be interesting to see whether this resumption of normal operations is permanent, or whether the worker unions will go back to striking in the near future. The workers had gone on strike as they were protesting against the planned budget cuts and asset sales. Petrobras is still in a precarious position because even though the reduction in spending will affect the workers drastically, the company needs to implement its revised plans in order to survive the current oil price environment and the persistent economic downturn in Brazil.

Petrobras stock declined around 0.4% over the week through Thursday. We currently have a price estimate of $7.41 for Petrobras. For the year 2015, we estimate revenues of $181.2 billion and EPS of $0.63, compared to a consensus estimate of $0.46. Please note that the calculated revenue figure has not been subjected to any intersegment elimination.

Shell-BG Deal In Choppy Waters Again As Chinese Regulators Want Concessions

After obtaining a delayed clearance from the Australian competition authority, the proposed Royal Dutch Shell Plc. (NYSE:RDSA) – BG Group Plc. (LON:BG) deal could have to jump through a few more hoops in order to get an all clear in China. The Chinese authorities reviewing the proposed merger are reportedly urging Royal Dutch Shell to dole out concessions on long-term liquefied natural gas (LNG) supply contracts with the country. ^[3] China’s gas consumption is expected to increase over the next five years and the country feels that this is an opportune time to renegotiate existing contracts. If approved, the Royal Dutch Shell-BG combination would supply around 30 percent of China’s gas imports by 2017. If Royal Dutch Shell is forced to renegotiate existing contracts with an important consumer such as China, it will add to the already-prevalent concerns about the near term viability for the Royal Dutch Shell-BG deal.

Ever since announcing the $70 billion deal to acquire BG Group back in April, Royal Dutch Shell has been busy these last few months obtaining the required merger related approvals from various regulatory authorities. After obtaining the required clearances in Brazil, the U.S., and Europe, the process had hit a snag in Australia as the country’s antitrust regulator decided to delay its decision by about two months to November. ^[4] Eventually, the competition authority concluded in its investigation that the proposed merger would not change the dynamics of the domestic market and subsequently announced last week that it is clearing the deal. ^[5] Shell now needs clearance from China and Australia’s Foreign Investment Review Board for the deal to close as planned in early 2016. However, getting an all-clear from the Chinese authorities will not be an easy task for Royal Dutch Shell. The Commerce Ministry, China’s main competition watchdog, has increased its level of scrutiny in recent years, going as far as blocking two deals involving non-Chinese companies in the last few years. ^[6] The regulatory body rejected a collaboration between three of the world’s largest shipping companies last year even after the collaboration had received European and U.S. clearance. ^[6] It also made Glencore sell one of its copper mines to a Chinese company before approving the Glencore-Xstrata transaction. ^[6]

Royal Dutch Shell stock gained around 0.5% over the week through Thursday. We currently have a price estimate of $62 for Royal Dutch Shell. For the year 2015, we estimate revenues of $337.3 billion and EPS of $4.04, compared to a consensus estimate of $3.63. Please note that the calculated revenue figure has not been subjected to any intersegment elimination.

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1. End of Oil Workers’ Strike, November 23, 2015, Petrobras Press Release [↩]
2. Petrobras Workers Agree to End Strike After Talks With CEO, November 14, 2015, Bloomberg [↩]
3. In Shell-BG review, China wants concessions on huge gas deals, November 19, 2015, Reuters [↩]
4. Shell’s Takeover of BG Faces Hurdle in Australia, September 17, 2015, Wall Street Journal [↩]
5. Australia watchdog clears Shell’s $70 billion bid for BG Group, November 18, 2015, Reuters [↩]
6. Shell’s $70 Billion Deal for BG Group Faces a Few Hurdles, April 9, 2015, Wall Street Journal [↩] [↩] [↩]