A denial from Shell PLC (LSE:SHEL, NYSE:SHEL) this morning of last night's Wall Street Journal report that the oil giant was holding "early stage" talks to acquire BP, has not stopped the buzz of speculation in the City of London on Thursday morning.
After the UK market close on Wednesday, the Wall Street Journal reported that Shell was holding "early stage" talks to acquire BP, with the discussions described as "active" with BP "considering the approach carefully."
It followed earlier reports in May that Shell was running numbers on a potential combination with BP, but the WSJ said Shell was waiting for further stock declines, another suitor to make the first move, or for BP to reach out.
BP’s US-listed shares jumped 10% following the report, while Shell’s shares fell 4% before the larger company quickly pushed back to Bloomberg that "no talks are taking place" and described the report as "market speculation".
Shell followed up with a formal statement this morning, denying any bid discussions, saying it has "not been actively considering making an offer for BP" and "has no intention of making an offer".
The market 'will increase the possibility of a bid'
UBS analyst Joshua Stone said the denial overnight did not fully quell market speculation: "Shell may have denied talks are taking place but, no matter how unlikely a combination might be, we think the market will increase the probability of a deal happening, leading to an overhang on the shares in the near-term."
Dan Coatsworth, investment analyst at AJ Bell, described the Shell-BP takeover talk as "second only to a bid for ITV as the perennial takeover talk that won’t go away."
He said: "The fact rumours keep circulating might suggest there is some truth in the matter, be it Shell or someone else looking to buy the UK oil and gas producer."
Coatsworth concluded: "This is a difficult one to call. All big companies will look hard at any acquisition opportunities in their sector that could greatly increase their size and scale. Ultimately, it comes down to price and whether the rewards outweigh the risks. Shell says it hasn’t been actively considering an offer, but that doesn’t mean it won’t do so in the future."
Indeed, Kathleen Brooks, head of research at XTB, said Shell’s "firm rebuttal" means any takeover of BP by Shell is "a 2026 story" now.
Shares of both companies rose in initial trading, before falling slightly into the red and then bouncing back, up around 0.4% to 2,573.5p for Shell and 366p for BP.
Logic to a deal
UBS's Stone noted investor preference for Shell over BP, attributing this in part to BP’s higher debt and weaker recent operational performance, while Shell’s equity story has been "extremely clean" over the past 12-24 months, "rooted in increased efficiency and predictable shareholder returns."
He added: "Any merger would require a rewriting of the Shell investment case which we believe, at least initially, would come to the detriment of shareholder confidence."
He also said BP shareholders, including activist investor Elliott, would likely demand a premium, complicating any deal. "Yet, the latest news likely means some level of acquisition premium lingers within the shares, providing a floor for the valuation, also noting the potential for other suitors to emerge."
Panmure Liberum analyst Ashley Kelty echoed these points, commenting that there "is a certain logic to the idea", citing Shell’s potential to boost its reserve replacement ratio by acquiring BP’s billions of barrels of reserves at a discount, plus cost synergies from removing duplication.
However, Kelty said the cost of BP’s "huge debt burden, low-value renewables businesses and Macondo liabilities" weigh against the deal, not to mention regulatory hurdles as a combination of the two would be big enough to rival the large US supermajors.
On the pro side, Kelty speculated that a move by Shell to list in New York might "give an uplift without the headaches of combining two massive organisations".
Tricky period
The shares of both have underperformed the FTSE 100 this year, XTB's Brooks noted, due in part to weaker oil prices.
"BP’s share price is still underperforming its global peers," Brooks said. "Now that Shell is out of the running as a potential buyer, we do not see BP repairing its position in the coming weeks or months."
Brooks added that while speculation will fade, there is some logic in oil majors combining. "The oil price could remain suppressed for some time, as there is ample supply in the market, for both this year and next," she said.
"This is a tricky period for the oil majors, and there could be strength in combining reserves."