What's going on?

Last year, Royal Dutch Shell, the European oil giant, bought British rival BG Group. On Tuesday, Shell outlined how it would make more money than expected as a result of this deal. The plan seemed to please investors as the stock jumped almost 3%.

What does this mean?

Shell acquired BG Group in a deal worth about �35 billion (a.k.a. it was a big deal!). The idea was that the combined operations would be able to strip out a lot of overlapping costs (i.e. synergies).

On Tuesday, Shell said the savings from the deal would be higher than they had previously outlined. The company also said it would sell off $30 billion worth of assets, like perhaps its drilling operations in the UK�s North Sea, in order to raise cash to pay off some of its debt and to continue to pay its shareholders the same annual cash return (a.k.a. its dividend). Prior to the recent big rally in the oil price, investors had been sceptical about the merits of the deal. But with a higher oil price, greater cost savings and higher projections for future cash, it appears that the deal makes more strategic sense to investors.

Why should I care?

For the stock: It�s all about the money, money, money� Or technically, the �free cash flow,� which means how much cash the company generates each year. Crucially, shareholders are hoping that by cutting costs and selling assets, Shell will be able to keep paying its relatively high dividend.

The bigger picture: This is a classic case of cost synergies at work. As a combined entity, Shell (incl. BG Group) is aiming to reduce spendings this year by $40 billion � that�s a 20% reduction versus the amount they spent as separate companies last year. Shell�s strategic rationale is well illustrated by that cost cutting figure. It�s a textbook example of why a large company might buy a rival.