Shell PLC (LSE:SHEL, NYSE:SHEL) isn’t pouncing. At least, not yet. But it is watching closely.
According to media reports, the company is actively weighing a takeover of BP PLC (LSE:BP.), one that would rank among the largest corporate combinations in UK energy history.
There is no deal on the table, and Shell may wait for BP’s shares to fall further or for another suitor to make a move first.
Still, the logic for a megamerger is compelling.
Scale and synergies
UBS boils it down to two simple forces: scale and synergies.
A combined Shell and BP would rival ExxonMobil on size, with nearly 5 million barrels of oil equivalent a day, over 90 million tonnes of annual LNG sales, and a vastly expanded retail footprint, especially in the US.
The deal would give Shell a route back into US onshore oil, add muscle in the Gulf of Mexico, and create a true European heavyweight in global energy markets.
The synergy potential is equally significant. Shell found $4.5 billion in cost savings when it acquired BG Group. UBS thinks a BP tie-up could unlock similar value, especially across overlapping downstream, trading and LNG operations.
Waiting game
But there are reasons Shell might hold off. The company has repeatedly said it prefers share buybacks over M&A, noting it took years to recover investor confidence after the BG acquisition.
UBS points out that Shell would need to find over $5 billion in post-tax synergies for a BP deal to be accretive to free cash flow, a tall order given the likely premium demanded by shareholders, including activist investor Elliott Management.
Then there is BP’s balance sheet. Leverage sits at 48%, the highest among the majors, and UBS calculates nearly $77 billion in provisions and liabilities tied to legacy issues like Macondo.
Risks beneath the surface
That leaves BP looking deceptively cheap on headline metrics, but loaded with risks beneath the surface.
And while BP’s upstream portfolio offers medium-term growth, it does little to extend Shell’s reserves past 2030. Reserve life would fall from 8.9 years to 8.1, weakening the long-term profile of the combined group.
UBS maintains a 'buy' rating on Shell with a 2,900p price target, calling it the most fit for lower prices in the sector thanks to its strong balance sheet and 12% free cash flow yield.
Challenging for BP
BP, by contrast, is rated 'neutral' at 400p, with UBS warning that delivery remains challenging amid ongoing restructuring.
The groundwork is being laid. Whether Shell moves from watcher to bidder may depend less on strategy and more on timing.
The market seemed to be largely discounting the takeover with BP shares up less than 1% at 352.55p. Shell's were off 2% at 2,438.5p.