Is Shell’s US$9.5bn Permian exit badly timed?

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Royal Dutch Shell Plc’s US$9.5bn exit from the Permian Basin, the biggest oilfield in the US, should give pragmatic investors pause for thought.


The quick and obvious narrative to draw is that Shell is simply going through the motions of its already laid out plan to divest and diversify towards ‘net zero’. As such, the decision to sell out of a basin that was at the core of America’s fracking revolution would, from an ESG point of view, be a no-brainer.


Investors evidently cheered the news with Shell shares up more than 4%, just above GBP14.90, on the promise that US$7bn of the US$9.5bn proceeds would be paid out in dividends.


If one blinkers off ESG and one-time payments to the periphery, it could possibly look like a more difficult deal to make a case for.


Nevertheless, Shell’s strategy has been made quite clear.


Such a deal probably shouldn’t be a big surprise – especially after the Anglo-Dutch was in June given the ‘hurry-up’ by a court in the Netherlands.


Chief executive Ben van Beurden, at that time, admitted that Shell would be required to make “bold but measured steps” over the coming years.


He also cautioned then that by speeding up its transition away from fossil fuels it would see its business shrink considerably.


To meet the obligations, Shell will need to cut its carbon emissions by 45% by the end of this decade.


It’s a real quickening compared to the company’s previously envisaged schedule (which was rejected by the Dutch court) as they would’ve seen a 20% reduction by 2030, by 45% by 2035 and 100% by 2050.


Van Beurden in June said that the ruling didn’t change Shell’s plans, just accelerated them. He added that the company would seek ways to reduce emissions in a way that was purposeful and profitable.


Today, Shell’s upstream director Wael Sawan said: “After reviewing multiple strategies and portfolio options for our Permian assets, this transaction with ConocoPhillips emerged as a very compelling value proposition.”


It is difficult to project precisely what impact the ruling really had on Shell’s strategic choices in subsequent months, nevertheless, the present energy market dynamics would leave room for debate.


Oil prices are resurgent and the squeeze on gas markets creates a substantially different outlook for producers than in the recent past.


Arguably, it is the best time in quite a long time to be an oil and gas producer particularly in places like the Permian.


Shell’s assets in the basin are due to yield some 200,000 barrels oil equivalent per day in 2022, growing from 175,000 barrels this year.


Last year the Permian operation made a US$491mln loss for Shell whilst crude prices were significantly lower (the WTI benchmark was close to cUS$40 per barrel for chunks of 2020, whereas today the price is closer to US$70).


This perhaps is partially reflected in the fact that a firm such as ConoccoPhilips, another of the so-called ‘super-majors’, is on the other side of the deal rather than a private equity buyer that could be allowed a more elusive PR strategy compared to either multinational corporation.


As Shell well knows owning a large oil and gas operation is an increasingly tricky business for a public company, with public shareholders.


The path ahead is laced with talk of transition and energy diversity, and in recent months there’s already been a steady stream of news talking points.


In early September Shell announced plans to install 50,000 charging posts for electric vehicles on streets across the UK by the end of 2025. Before that, it hooked up with ScottishPower for the joint-development of floating offshore wind farms in the north-east of Scotland.


Swiss bank UBS this summer highlighted, in a note, that shareholder returns would be critical for companies like Shell as they remake themselves.


“A critical element of the investment case in any oil company, given the challenges of energy transition and ESG effects on institutional investors, is a strong financial case and an attractive payout forms an important component part,” the bank said earlier this year, as BP promised to distribute 20-30% of cash flow back to shareholders.


So, whatever of the long-term ramifications of the Permian, evidently Shell shareholders shall be happy with their dividend boost.

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