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Despite company denials, Shell chief executive Wael Sawan has not explicitly ruled out a possible merger of the Dutch oil company with British rival BP, which could be a hedge against ongoing oil price woes.
Both supermajors have been in the doldrums after starting out with bold energy transition goals that ultimately met with backlash from investors.
Activist investor Elliott Management amassed a 5% stake in the British oil company in 2025 to force change. With BP’s fortunes having suffered this year, and the company deeply cutting its low-carbon investment targets, brokers are reportedly exploring a possible merger.
Value hunters
Shell recently combined its North Sea oil and gas assets into a joint venture with Equinor, sounding the drum that it is beating an acquisition path.
Following the £157bn oil company’s Q1 results in early May, Sawan said he would rather buy back more company shares than launch a takeover bid.
“As we have said many times before, we are sharply focused on capturing the value in Shell through continuing to focus on performance, discipline and simplification,” a Shell spokesperson said.
Sawan has been repeatedly pressed on the question of a merger with BP. He told analysts that the Dutch oil company has capital earmarked for inorganic acquisitions, and that the company’s culture is shifting onto a footing that could accommodate a merger.
“I have said in the past that we want to be value hunters. Today, value hunting – in my view – is buying back more Shell,” Sawan pointed out on an analyst call at the end of the first quarter.
“Why? Today, our share price continues to be advantaged. We said in the past that the free cash-flow yield meant it was advantaged, and even more so today where things stand.”
Consolidation ‘likely’
It is not just BP that could be up for grabs. A weaker economic backdrop following US president Donald Trump’s global tariff spree has “clouded the outlook for oil and gas prices”, according to analysts.
“Chatter that Shell is interested in buying BP has been bubbling away for a while but talk seems to be heating up,” AJ Bell investment director Russ Mould tells Energy Voice.
“BP’s cheaper valuation compared to many peers makes it vulnerable to a takeover from someone in the oil and gas industry, not necessarily just Shell.”
That makes it “even more likely we’ll see more industry consolidation”, Mould adds.
“When times get hard, companies often seek economies of scale and cost synergies through mergers and takeovers.”
European shares “remain cheap relative to the US market despite greater investor interest this year”, according to the analyst. This means markets like the UK are “still ripe for M&A” due to widespread valuation opportunities.
“If a foreign or domestic company was in the mood to do deals, there remain plenty of UK-listed stocks ripe for the taking,” says Mould. “It is against that backdrop that we continue to see a flurry of mergers and acquisitions activity and speculation among UK stocks.”
© BloombergInorganic opportunity
According to reports, investment banks were appointed to engineer a merger between the companies in February.
Shell has earmarked up to $2bn in its capex guidance for acquisitions, though this still falls far short of BP’s £82.7bn market capitalisation. That would likely mean an acquisition would require leverage.
Other potential bidders for BP have included Exxon Mobil and Chevron.
“We will always look at these things, but you are also looking to see what is the alternative,” Sawan told the Financial Times.
He said on a call with analysts that Shell would “lean” with conviction into share buy-backs, “and within that 40%-50% of CFFO range”.
He pledged that the company would be “prudent”, but that it would “keep looking at inorganic opportunities”.
Shell has earmarked $1-2 billion in its cash capital expenditure (capex) guidance for inorganic acquisitions, Sawan said.
“The bar is high and we need to be able to see a pathway towards free cash-flow per share accretion in a relatively short period,” he added.
On an analyst call, Scotiabank GBM analyst Paul Cheng asked Sawan if the organisation or culture had “turned sufficiently” enough to launch an acquisition. He asked Sawan if it could take one or two years to ensure changes are fully in place.
Sawan agreed that before the company would look at inorganic, especially sizeable inorganic, acquisitions it would have to have its “house in order”.
The CEO defended the culture at Shell. He said the company had a “winning performance culture” that is “next level” with a “hunger to win”. Yet he admitted that this drive on performance was not “fully rooted” in the company today.
Transformation can ‘destroy’ value
Shell’s executives have indicated that acquisitions could be a way to generate value, but Sawan has outlined the challenges with absorbing new acquisitions into the business given the complexity.
“Pavilion is an LNG acquisition we did,” he told analysts. “We had a very clear view that this is a complex portfolio [and] would take us several months to be able to integrate into Shell.”
Analysts have warned of the complexity of acquiring a company such as BP, which has activities in multiple international markets.
“Anyone buying BP – whether that is Shell or another peer – would need to prepare themselves for a potentially complex deal,” Mould tells Energy Voice.
“On paper, you would think parking together two companies in the same sector would be easy; in reality, this could take a long time to execute and integrate. Shell has already been through this hassle once before, when it acquired BG for £47 billion in 2015. That acquisition has turned out to be a good one, but most ‘transformational’ deals destroy, not create value.”
At Shell’s capital markets day, the company laid out a dramatic cost-savings goal that partially eroded its climate targets.
Wells Fargo Securities analyst Roger Read asks whether, given lower oil prices, Shell would embark on its cost-cutting exercise with “more urgency”. He also asks how Sawan would allocate capital towards acquisitions, while maintaining resiliency of the dividend.
Shell chief financial officer Sinead Gorman said “value creation is the key”, and that it was the company’s “north star”. She indicated that the company may be willing to invest for growth amid low oil prices, making it a potential stalking horse.
As the oil price has fallen, the company’s shares have “got cheaper”, she added.
“So it’s an even better capital allocation for us,” she said.
