OREANDA-NEWS. Fitch Ratings has placed Royal Dutch Shell's (Shell) ratings on Rating Watch Negative (RWN) and BG Energy Holding's (BG) ratings on Rating Watch Positive (RWP) following confirmation that the acquisition of BG by Shell has been agreed by the boards of two companies.

The agreed terms of the combination assume a total consideration of around USD70bn, including USD20bn in cash. The acquisition is pending approval from both companies' shareholders and various regulatory authorities.

Fitch aims to resolve the Rating Watches on both companies pending the successful completion of any potential transaction in 1H16 and once there is greater clarity with regard to Shell's post-acquisition strategy and potential synergy effects.

KEY RATING DRIVERS
Shell's Leverage to Increase
The RWN on Shell reflects our view that a moderate deterioration in the company's financial profile from the acquisition is possible. Shell has publicly indicated that as a result of the transaction, gearing (net debt to total capital) will increase to 20% from 12.2% as of end-2014. Our current forecasts suggest that the company's funds from operations (FFO) adjusted net leverage will increase from 1.5x at end-2014 to around 2x in 2015-2017 based on conservative assumptions around the announced USD30bn divestment programme and execution of the announced share buybacks from 2017. This compares to pre-acquisition expectations of 1.45x in 2015-2017 and our existing negative ration action trigger of above 1.5x on a sustained basis). This may result in a downgrade as the enhancement of Shell's business profile may not fully offset any deterioration of credit metrics. Over the course of 2015 we expect to receive more clarity regarding the deal and actions by Shell to restore its credit metrics. However, we currently do not expect a downgrade below 'AA-'.

Enhanced Business Profile
The combination should further strengthen Shell's business profile. In 2014, Shell produced 2.27 million barrels a day of oil and oil equivalents (MMbpd), excluding equity affiliates, making it the largest European oil and gas major. We expect the combined production of both companies to be around 2.9-3.0MMbpd in 2015-2017. BG's two largest projects, QCLNG in Australia and the pre-salt deep offshore fields in Brazil, should enable Shell to strengthen its positions in the LNG market and boost upstream liquids production.

BG's Credit Risks to Reduce
The RWP on BG reflects Fitch's view that the acquisition by Shell, if successful, would be a significant credit enhancement to BG's existing business and materially reduce the risk of default for BG's outstanding debt. Fitch would likely align BG's ratings with Shell's following successful completion of the acquisition. The one exception would be BG's hybrid capital instruments, which if not redeemed as part of the transaction, would likely remain two notches below BG's senior unsecured rating.

For a full list of key rating drivers for each company, see the most recent Rating Action Commentaries at www.fitchratings.com.

RATING SENSITIVITIES - SHELL
Positive: Future developments that could lead to positive rating action include:
-Increasing oil and gas production by more than 20%, resulting from the business combination.
-Positive free cash flow (FCF) generation on a sustained basis.
-FFO-adjusted net leverage consistently at around 0.5x.

Negative: Future developments that could lead to negative rating action include:
- Project delays leading to deferred cash generation.
- Volatile financial profile with FFO adjusted net leverage greater than 1.5x (downgrade to AA-) and greater than 2x (downgrade to A+). Fitch's current expectations are 2x in 2015-2017.
- Negative FCF due to higher than expected capex.

RATING SENSITIVITIES - BG
Positive: Future developments that may, individually or collectively, lead to an upgrade:
- Successful completion of the proposed acquisition by Shell

Negative: Future developments that may, individually or collectively, lead to a downgrade:
- The ratings are currently on RWP. As a result, Fitch's sensitivities do not currently anticipate developments with a material likelihood of leading to a downgrade.

KEY ASSUMPTIONS
- Successful completion of the potential transaction in early 2016.
- Cash condensation of around USD20bn paid by Shell.
- Combined production to average 2.9-3.0MMbpd in 2015-2017.
- Brent prices to average USD55/bbl in 2015; recovering to USD65/bbl in 2016 and USD80/bbl in 2017.

FULL LIST OF RATING ACTIONS
BG Energy Holdings
Long-term IDR: A-'; on RWP
Short-term IDR: 'F2'; on RWP

BG Energy Finance Inc.
Short-term debt rating: 'F2'; on RWP

BG Energy Capital plc
Senior unsecured rating: 'A-'; on RWP
Short-term debt rating: 'F2'; on RWP
Subordinated hybrid debt: 'BBB'; on RWP

Royal Dutch Shell plc
Long-term IDR: 'AA'; on RWN
Senior unsecured debt: 'AA'; on RWN

Royal Dutch/Shell Group
Long-term IDR: 'AA'; on RWN
Senior unsecured debt: 'AA'; on RWN

Shell International Finance
Senior unsecured debt: 'AA'; on RWN

Royal Dutch Shell did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure.