Shell Considers BP Takeover in What Could Be a Historic Oil Sector Merger

Shell is looking into the feasibility of buying BP, which has sparked speculation about what could be one of the biggest mergers in the oil and gas industry. Bloomberg says discussions have been started by Shell with advisers who are looking into the strategic and financial upsides that such a deal might merit. While no offer has been made and the talks are said to be at an early stage, the prospect of the UK's two largest energy companies joining forces has gotten people talking.

Shell is thinking about taking over BP, which is suffering from an internal crisis of investor confidence. Shareholder allegations regarding BP's weak management performance have prompted an independent UK consulting firm to audit BP's business. The results of that audit appear to have shaken the confidence of BP's board of directors, with the firm's evaluations of BP's serious operational problems and its forecasts of BP's recovery prospects being quite bleak.

Diverging Fortunes and Strategic Dilemmas

There is a striking contrast in the performance of the two companies. With a market value of around GBP 145.6 billion (almost INR 15.3 lakh crore), Shell is more than twice the size of BP, which stands at GBP 55.9 billion (approximately 5.9 lakh crore). Shell posted adjusted profits of USD 5.6 billion for the first quarter, a 28% year-on-year decline but still ahead of analyst expectations. BP, meanwhile, saw its quarterly profits fall nearly 50% to USD 1.4 billion.

The leadership at Shell has been prudent. CEO Wael Sawan has signaled that the company’s own share repurchases may currently be a better return opportunity than a high-risk merger. But the idea of a high-risk merger still remains on the table. Evaluating such opportunities against the alternative uses of capital is obviously a very high-order judgment call in the current environment. And it seems to be one that Sawan and his team are keeping in mind.

BP’s Strategic Struggles Open the Door

BP's latest underperformance has rendered it exposed and less resilient. Inevitably, this has put its new chief executive, Bernard Auchincloss, under intense scrutiny. Elected in January 2023, he has not yet proven his strategic decisions are effective ones. Indeed, he has taken the situation and BP's decrepit stock price and dividends under his wing and initiated a somewhat unpredictable narrative. 

The unexpected exit of previous CEO Bernard Looney in late 2023 left the company in the lurch, transitioning into new leadership while trying to find its footing and an overall strategic direction.