UK oil giant knocks down rumors of merger with struggling rival BP

Shell, the massive oil company based in London, said Thursday it has “no intention” of buying out BP, after a report by The Wall Street Journal claimed Shell was in early discussions to purchase its rival in a deal estimated at nearly $80 billion.

The report hit late Wednesday and immediately sent shockwaves through energy markets. Within hours, Shell denied any such talks and stressed that it was sticking to its capital discipline strategy. BP refused to comment when asked.

The timing of this story is brutal for BP, as it has been under pressure after a year of poor stock performance and operational setbacks. The stock is down more than 6% year to date, and analysts have started to flag BP as an easy target for takeover.

For Shell, which is up over 4% this year, scooping up BP would’ve given it instant control of more oil fields and an expanded footprint in places like the Permian Basin, but not without serious challenges.

Analysts question value and impact of deal

Allen Good, who runs equity research at Morningstar, told CNBC the numbers don’t add up for Shell. “Absent a very attractive valuation, we do not see the merits of buying BP as it would not necessarily leave Shell better off or address its lack of growth, even as it would get it back into the Permian,” Good said by email.

He pointed out that while the idea might appeal on paper, any real benefit would depend on Shell slashing costs and dumping BP’s underperforming assets, something that would probably face internal resistance.

Even with those changes, Allen said it might still be a better situation for BP shareholders if the company handed over control. “Selling BP might be the best thing BP’s board and management could do for shareholders,” he added.

BP’s leadership has been trying to hold the line. Earlier this year, CEO Murray Auchincloss announced a total reset of the company’s direction, aiming to rebuild trust. Despite that pivot, BP’s first-quarter results came in weaker than expected. In late April, Murray insisted in an interview with CNBC that the company was “off to a great start” in its new direction, though the financials told a different story.

That rough start led to a big drop in BP shares back in April, triggered in part by trade war tension that rocked global financial markets. Since then, the price has leveled out, but the uncertainty remains. And as long as that continues, the idea of a takeover, whether by Shell or someone else, is going to keep popping up.

Merger would draw scrutiny over antitrust and jobs

From a regulatory standpoint, merging the UK’s two biggest oil companies would raise immediate red flags. Analysts say the combination could trigger serious antitrust pushback, especially in Europe, and would almost definitely come with major job cuts. Shell and BP have different corporate cultures and overlapping operations. Trying to smash the two together would be a nightmare, not just financially but politically.

Russ Mould, who works as investment director at AJ Bell, told CNBC that Shell pulling back from this idea matches the company’s current financial strategy. “While it is possible to make a case for a deal on the scale it would provide in oil and gas, and perhaps on valuation grounds, any integration would be far from straightforward, given the companies’ different cultures and the likely job losses, which could well have proven politically sensitive,” he wrote.

Russ also noted that when the story broke, Shell’s stock price took a small dip on Wednesday. But when Shell denied it, the price bounced up nearly 1% by Thursday morning.

Then there’s Nick Wayth, now CEO of the Energy Institute, who worked at BP for over 20 years. Speaking Thursday morning on CNBC’s Squawk Box Europe, Nick said, “I’m not going to get drawn into the speculation around BP and Shell other than to say that even if something were to happen, [it is] hugely complex, hugely overlapping portfolios and a lot of regulatory hurdles to jump through.”

Nick also confirmed on air that he still holds shares in BP.

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