Conoco Buys Shell's Permian Assets for $9.5 Billion

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ConocoPhillips has agreed to buy Royal Dutch Shell’s assets in the Permian Basin for $9.5 billion in cash, marking a major expansion for the independent in the US’ premier oil play as the Anglo-Dutch supermajor exits amid legal and investor pressure to reduce its carbon emissions.

The deal, announced late Monday, follows months of speculation around Shell’s plans to sell out of the Permian, its last remaining US shale asset. The transaction achieves strategic objectives for both companies.

For Shell, the sale moves the company toward its targets for reducing absolute emissions of both carbon dioxide and methane as it focuses on less emissions-intensive operations in offshore and LNG. It also brings a large injection of cash, a significant portion of which will be distributed back to shareholders.

Conoco, meanwhile, will become a truly dominant force in one of the world’s most important oil fields, expanding its position with largely contiguous acreage at a low cost of supply. The company touted the assets’ low greenhouse gas (GHG) intensity, which it says will further its own goals to be a net-zero emitter by 2050.

Deal Snapshot

Shell’s Permian position includes around 225,000 net acres located entirely within Texas in the Delaware subbasin of the Permian, as well as over 600 miles of operated crude, gas and water pipelines and infrastructure.

Conoco estimates production from the assets in 2022 will hit about 200,000 barrels of oil equivalent per day, roughly half of which is operated. The assets currently produce around 175,000 boe/d.

The deal is expected to close in the fourth quarter of 2021, subject to regulatory clearance.

Shareholder Returns

Both companies stressed the benefits of the deal to shareholders.

Shell said it will allocate $7 billion of the sale price after it closes to additional shareholder distributions, with the rest used to further strengthen its balance sheet.

It said these distributions “will be in addition to our shareholder distributions in the range of 20%-30% of cash flow from operations.”

Conoco said it will pay for the deal with available cash “while still retaining a significant level of cash on the balance sheet for general purposes.”

“Our underlying business drivers will be stronger and the expanded cash flows derived from this transaction mean shareholders will benefit from higher returns of capital,” Conoco CEO Ryan Lance said in a statement. “The assets we’re adding improve our ability to generate returns that are consistent with what investors demand through cycles.”

Conoco now plans to increase its asset sale target by 2023 from $2 billion-$3 billion to $4 billion-$5 billion. The additional sales will come from the Permian as Conoco high-grades its portfolio in the play. It will also maintain its previous debt-reduction target.

Conoco also announced a 7% increase in the company’s quarterly dividend, from 43¢ per share to 46¢/share, representing a current dividend yield of 3%.

Emissions Reduction

Shell has been one of the most outspoken oil companies on the need to reduce emissions from operations (Scope 1 and 2). It is also under growing pressure to do so, from investors as well as the courts.

Earlier this year, a Dutch court ruled Shell must work harder to reduce emissions this decade, although Shell has appealed the ruling.

The sale of its Permian assets will remove a large chunk of oil production from its portfolio, which will help it tackle slippery Scope 3 emissions — those from the use of products — as well as Scope 1 and 2.

Conoco also framed the deal as an opportunity to improve its emissions profile.

In conjunction with the transaction, Conoco now says it will improve its Scope 1 and 2 GHG emissions intensity reduction targets from a 35%-45% reduction by 2030 to a 40%-50% reduction, based on 2016 levels.

Shell has done a lot of that work itself in the Permian, chopping GHG and methane intensity by 80% through investment in infrastructure and technology.

Net Zero, Net Negative

It is still not clear how much the deal will help with overall global emissions, however.

Abhi Rajendran, Energy Intelligence’s director of oil markets research, said the deal is a “net negative” for carbon emissions reductions since the assets are much more likely to be fully developed and more quickly by Conoco than by Shell.

“If these assets had just stayed with Shell over the next five to 10 years, there’s no way investors would have allowed them to commit the capital to significantly develop them,” Rajendran said.

M&A, Shale, Corporate Strategy , CO2 Emissions
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