Is Shell Sizing Up Oil’s Biggest Power Grab Yet?

BP’s weak first-quarter results and stock underperformance over the past year rekindled speculation that the UK-based supermajor could be a target of a blockbuster acquisition. As it has been speculated on and off for decades, UK peer Shell could be the most likely buyer, according to recent market talk.Speculation about another oil giant taking over BP is not new—such rumors have been swirling for over a decade, particularly ones suggesting that Shell could be the bidder for a merger with BP.Speculation about a blockbuster acquisition involving BP resurfaced again this year after activist hedge fund Elliott bought nearly 5% in the UK-based supermajor and demanded changes, big and fast.BP’s shares have underperformed the stocks of the other four of the Big Oil group – Shell, TotalEnergies, ExxonMobil, and Chevron – ever since 2020.Neither former BP CEO Bernard Looney, with the push toward renewables, nor his successor Murray Auchincloss, with the strategy reset to return on the path of oil and gas, have managed to erase the company’s underperformance in the past five years.After BP reported the weakest set of Q1 results among Big Oil and reduced by $1 billion its quarterly share buyback program as cash flow declined and net debt rose, speculation of a Shell-BP megadeal intensified.This week, Bloomberg reported that Shell is considering the merits of a takeover bid for BP, which has seen its fortunes dim recently after its rather premature bet on a fast energy transition.Unnamed sources familiar with the developments have told Bloomberg that Shell was studying a takeover that would depend on whether the BP stock would continue to decline after losing close to 30% over the past 12 months.Neither Shell nor BP have commented on the media and market speculation.Shell’s CEO Wael Sawan told analysts on the Q1 earnings call last week that “before we ever look at a sizable inorganic, we have to have our own house in order.”“I’ve said in the past we want to be value hunters. Today value hunting, in my view, is buying back more Shell,” Sawan said.Still, market analysts and investment banks have started to run the numbers on how big a Shell-BP oil and gas giant could be.For sure, a combined group would have nearly 5 million barrels of oil equivalent per day (boepd) in oil and gas production, UBS has estimated.It would be the world’s biggest investor-owned oil and producer, outpacing ExxonMobil, whose worldwide oil-equivalent production was 4.55-4.6 million boepd in the past two quarters. Chevron’s net oil-equivalent production was 3.353 million boepd in the first quarter. That’s higher than Shell’s 2.7 million boepd, but it could be dwarfed by a combined Shell-BP producer.A Shell-BP merger will also materially increase Shell’s already number-one global position as the top LNG trader.However, a potential transaction would face high execution and regulatory risks, analysts also say.“We think the combination of BP’s debt, hybrids, lease commitments and Macondo liabilities would present something of a poisoned chalice for Shell, a company that has typically been conservative with its balance sheet,” analysts at RBC said, as carried by Bloomberg.Even if Shell were to decide that the potential gains from a BP deal would be worthwhile and opted to break its fiscal discipline, a giant Shell-BP company would face regulatory scrutiny in a number of jurisdictions, beginning with the UK North Sea. A megadeal would result in asset sales, too, according to analysts. One reason would be competition concerns in some markets as the combined Shell-BP share would be too big to ignore—and any regulatory approval could be conditional on sales of assets.There may be solid rationales for a Shell-BP deal, but the reward may not be worth the risk.By Tsvetana Paraskova for Oilprice.com