ConocoPhillips (COP) Doubles Down On Crude Oil Bet By Making Blockbuster Deal With Shell Enterprises
3:42 pm Tuesday, September 21st, 2021
Roughly eight months after completing a blockbuster $13 bln acquisition of Concho Resources, ConocoPhillips (NYSE:COP) is placing another massive bet on the Permian Basin be purchasing Shell Enterprises’ (RDS.A) Delaware Basin assets for $9.5 bln in cash. In a world that’s steadily moving towards renewable energy production, these acquisitions put COP’s confidence in the future of fossil fuels squarely under the spotlight. With crude oil prices surging by ~75% yr/yr, the commodity has indeed experienced a revival as economies around the world have reopened. Clearly, the company believes that healthy prices are sustainable, even as environmental regulations increase.
If COP is correct, the company will be well-positioned to capitalize on a strong oil and gas market. Prior to the Concho acquisition, COP held 170,000 net acres in the Permian Basin. If this transaction with Shell Enterprises’ is completed, the net acreage will expand to nearly 1.0 mln. From a production standpoint, the acquired assets are estimated to generate 200 MBOED in 2022. For some context, COP reported 1,359 MBOED on a year-to-date basis when it issued Q2 results on August 3.
A major plus is that COP doesn’t need to take on more debt to finance this deal, thanks to its strong cash flow generation this year. On that note, the company produced $6.3 bln in cash flow from operations during 1H21. COP will, however, ramp up its divestiture efforts to help raise capital for the deal. Specifically, the company lifted its 2023 divestment target to $4-$5 bln from $2-$3 bln.
From Shell’s perspective, the sale takes a substantial amount of environmental-related pressure off the table. This past May, a Dutch judge ruled that Shell must cut its carbon emissions by 45% by the end of the decade. This transaction represents a significant step towards achieving that milestone. Furthermore, it appears that Shell locked in a solid price tag for its Permian assets, despite being in a vulnerable negotiating position due to the court’s ruling. Shell’s Director of Upstream Operations, Wael Sawan, commented that the deal gives Shell the equivalent of more than a decade’s worth of cash flow from the Permian assets. Last year, the Permian assets registered a before-tax operating loss of $(491) mln, but plunging oil prices during the pandemic greatly impaired those results.
Given the two contrasting views on the future of energy production between COP and Shell, this deal is intriguing and it will be interesting to see how it plays out over the coming years. For now, it looks like a win-win scenario as COP significantly bolsters its production and cash flow generation capabilities, while Shell receives a windfall of cash and reduces its future regulatory/litigation risks.
