Shell Plc is contemplating a takeover of rival BP Plc but will likely wait for further declines in BP’s share price and oil markets before making any decisive moves. Here’s what investors need to understand about this possible merger.

Reasons Shell Might Pursue BP

• Enhanced Scale and Synergies: A merged Shell and BP would compete with industry giants like ExxonMobil and Chevron, leading to substantial cost savings in exploration, refining, and distribution.

• Relative Financial Strength: With a market value of around £149 billion, Shell stands strong compared to BP, allowing it to absorb another major player.

• Capital Allocation Choices: CEO Wael Sawan has shown interest in share buybacks but has also hinted that large-scale mergers are possible if the financial metrics align.

Waiting for the Ideal Entry Point

Shell’s advisors are exploring various scenarios indicating that BP’s stock and overall oil prices may need to decrease further. By postponing any potential acquisition, Shell can:

1. Enhance Financial Viability: Lower enterprise multiples can minimize dilution risk for shareholders.

2. Strengthen Financial Position: Continuing buybacks and smaller acquisitions help maintain a firm balance sheet.

3. Monitor Regulatory Environment: By waiting for conservative market valuations, Shell can lessen regulatory scrutiny concerns during the acquisition process.

Key Risks and Considerations

Antitrust Regulatory Challenges

A merger of two leading oil companies based in London may face strict examination from regulators in both the EU and the U.S.

Execution Challenges

Integrating the refining operations, joint ventures, and upstream assets of both companies will challenge logistics due to varied regulatory frameworks.

Investor Sentiment

Shareholders need to balance the risk of merging against the benefits of immediate share buybacks.

What Investors Should Monitor

• Credit Metrics for BP and Shell: Changes in their ratings post-announcement could influence funding costs.

• Regulatory Filings: Any merger notifications will emerge in upcoming 10-K/20-F documents, which investors should track closely.

• Oil Price Trends: Continued declines in Brent and WTI could positively impact deal calculation, allowing investors to time the entry effectively.

Conclusion

Shell’s exploration of acquiring BP highlights the tension between aggressive growth via mergers and cautious capital returns through buybacks. By timing a bid with lower valuations and oil prices, Shell aims for a strategic acquisition while keeping buybacks as an alternative. Investors should stay alert to credit ratings, regulatory changes, and oil benchmarks as they navigate this potential deal.