British oil and gas giant Shell Plc has quashed a rumor: It’s not buying BP Plc. But last week’s forceful denial doesn’t address why the M&A chatter gained so much traction, which has less to do with the parlous state of BP than with Shell itself. Looking to 2030 and beyond, it does feel like Shell needs to buy something or someone.
Since his January 2023 appointment as chief executive officer, Wael Sawan has done a decent job steadying Shell. Spending and debt are down, unprofitable green projects are gone and cash generation is improving. That’s all well and good; but viewing such business basics as evidence of success just shows how the wheels had fallen off before his arrival. What’s still missing is any sense of a vision to sustain oil and gas production beyond the next five years.
To achieve that, sooner or later Shell will need to make acquisitions; it could be a series of projects, or it could be a rival. If that’s the case, the best time to pull the trigger could come soon as the plunge in oil prices creates industry-wide distress, creating opportunities.
Admittedly, the “show-us-your-2030-plan” demand is a bit premature – and even a little unfair. Sawan has plenty on his plate from 2025 to 2027 before turning his attention to the next decade. Shell is trying its best to keep the focus on the task at hand now, telling investors that its priority is “performance, discipline and simplification.”
To the company’s credit, its narrative is working. Year-to-date, Shell has beaten its Big Oil rivals, with shares up 4%. Exxon Mobil Corp. is up by about half of that; Chevron Corp. is about flat, while TotalEnergies SE and BP are both down. Crucially, Sawan has turned the page on Shell’s tendency for nasty earnings surprises every few quarters. It’s almost as if the company had gone back to the years of “You Can Be Sure of Shell” – one of the advertising industry’s best-known taglines.
Still, the company’s own forecasts, last updated at its March capital markets day, make it clear that fossil-fuel production will decline in the early 2030s. That leaves Sawan with four options: 1) do nothing and let output fall, perhaps betting that oil demand peaks in the early 2030s; 2) use organic opportunities to squeeze out a few extra barrels; 3) make a few bolt-on purchases in the sub-$10 billion range, beefing up the hopper for a few years; or 4) go big with a major acquisition, in the $50-billion-plus range.
Filling the production drop from 2030 to 2035, probably in the range of 200,000 to 300,000 barrels per day — or about 10% of its total — is possible without acquisitions. The company has been expanding its working interest in some of its key projects, effectively buying more barrels with relatively little incremental capital. Only this year, it upped its ownership in the Ursa project in the Gulf of Mexico to 61% from 45% for $735 million, and in the Bonga field in Nigeria to 67.5% from 55% for $510 million. More of the same can be a cheap way to boost output, and Shell has a $1 billion to $2 billion wiggle room for such opportunities within its current annual $20 billion to $22 billion capital spending target range.
If similar transactions aren’t enough, Shell may pursue smaller deals. TotalEnergies has demonstrated the power of bolt-on acquisitions, with timely purchases including the $7.5 billion deal for the oil business of shipping giant A.P. Moller - Maersk A/S in 2017. So has Chevron, which bought PDC Energy Inc. for just over $6 billion in 2023. Both show that Big Oil doesn’t need transformative M&A — buying BP, say, which has a market capitalization of around $80 billion — to expand reserves and production.
Is there a case for larger deals? Perhaps. I believe that a Shell-BP merger is still possible, but it has a much better chance of happening if BP, admitting it’s in a corner, makes the first move and the deal becomes a merger at a nil premium. I don’t see Shell paying a takeover premium; Sawan has other options for a big transaction. Keep in mind that two large American companies are likely to undergo CEO successions soon: ConocoPhillips (market value $115 billion) and Occidental Petroleum Corp. ($43 billion). Both are closely associated with their current bosses, Ryan Lance and Vicki Hollub, respectively. The retirement of either in the next few years could create an opening for Shell. There are other names, including pure play US shale companies, but those aren’t cheap.
For now, Sawan is focused on improving financial performance in the hope that will narrow the valuation between his company and rivals. Shell has long traded at a discount to American oil businesses. Narrowing the gap would be critical if M&A is needed as Shell is likely to use some of its stock as currency. In some ways, by focusing on buying back Shell’s own shares so strongly, Sawan is making a potential future acquisition easier– even if he’s not saying that publicly.
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