Image source: Olaf Kraak via Shell plc
The Shell share price fell 2.1% yesterday (6 May) on reports published over the bank holiday weekend that the group’s thinking about buying BP (LSE:BP.).
On many levels, the deal makes sense to me. Bringing together two companies in the same sector should help deliver operating synergies.
And now could be a good time to make it happen. BP’s current stock market valuation is 4% below its book value. In contrast, Shell trades at a 10% premium.
However, yesterday’s reaction suggests there are doubts as to whether a deal will happen. Here are four reasons why I agree.
1. Déjà vu
Firstly, we’ve been here before.
In 2004, according to the autobiography of Lord Browne, the former chief executive of BP, a minority of directors on the company’s board blocked his proposals for a ‘mega-merger’.
And in 2012, Peter Voser, Shell’s boss at the time, told a German newspaper that the group (and others) had considered buying its peer. He said: “I can’t imagine that there was anyone in our industry that didn’t have a look at it.”
2. Volatile prices
After President Trump’s ‘Liberation Day’ announcements, the price of oil fell on fears of a global recession. And it still hasn’t recovered. This means BP’s market cap is 12% lower than it was at the start of the year.
According to Bloomberg, Shell’s final decision about whether to proceed with a deal will depend on whether the share price of its smaller competitor continues to go down.
Although falling energy prices – in theory – make BP cheaper to buy, they also create greater uncertainty about the potential future earnings of the company.
Therefore, in my opinion, until Trump’s approach to tariffs becomes clearer, it’s unlikely a deal will happen.
3. Other candidates
BP’s just one company operating in the sector. If Shell wants to expand, there are many other (cheaper) options available to it.
It could be that investors don’t see Shell and BP as a good fit.
BP’s recent share price performance has lagged behind that of its larger rival.
And its result for the first quarter of 2025 fell short of analysts’ expectations. Also, it reported a 17% ($3.97bn) increase in net debt compared to the previous quarter.
4. Buybacks
Finally, when asked whether he wanted to buy BP, Shell’s chief executive, Wael Sawan, recently told the Financial Times that he would rather the company buys its own stock.
And if BP’s financial performance continues to disappoint, this could be a better use of the $36bn of cash that Shell has on its balance sheet.
Final thoughts
Buying shares on the basis of takeover rumours isn’t a good idea. Most of them turn out to be false and share prices that have been driven higher as a result of the speculation can quickly fall. Regulators could also block a deal.
As I already own shares in BP, I welcome anything that could increase their value. However, even if the rumours prove to be unfounded, I plan to retain my shareholding.
That’s because the stock’s currently yielding 6.7% and the demand for hydrocarbons continues to rise. I’m also hopeful that Elliott Investment Management, the activist investor that recently took a 5% stake, will help bring about the changes needed to improve the group’s free cash flow.
