Breakingviews - Shell's BP time-out is a blessing in disguise
In recent months Sawan has repeatedly said he is focused on share buybacks and his strategic overhaul of Shell's costs, and not on its crosstown peer. But the WSJ story, which cited unnamed sources to assert that early talks were ongoing, moved the companies' New York-listed securities. The upshot is Shell's formal statement on Thursday morning, saying it has not made an approach, had talks, or harboured an intention to make an offer for its rival.
That isn't the end of the story, though. While Shell can't now make a hostile offer for six months, it can agree a friendly one if the BP board plays ball. It can also lob in a bid if a third party does. With BP's market value less than 40% of Shell's, and the promise of chunky synergies, a UK mega-merger has strategic logic.
That said, timing is important. Had Shell offered a 30% premium right now, BP's enterprise value would be $159 billion. Goldman Sachs analysts expect BP to make less than $17 billion in operating profit in 2026. Add in the $4 billion Shell might strip out in cost synergies – about 25% of BP's $16 billion of distribution and administration expenses in 2024 – and tax the total at the 40% tax rate BP guides to. The overall return for Shell would still be less than BP's capital cost of around 8%, as estimated by Morningstar.
Next year things may look different. In 2025, Shell's shares have risen 4% while BP's are off 7%, even though Shell's estimated 12% free cash flow yield for 2026 suggests it's still undervalued. By late 2026 Sawan will be much further progressed with his turnaround plan and the two companies' valuation gap may have widened, juicing the return.
The main risk for Sawan is that activist investor Elliott Investment Management helps whip BP into shape, hiking its valuation. The group might also locate a credible new chair who can extract a higher price out of Shell than incumbent Helge Lund, expected to leave in 2026. One potential candidate, former Anglo American boss Mark Cutifani, is leaving, opens new tab his role chairing Vale's base metals unit. But on balance, if Sawan does eventually fancy a tilt at BP he wins more than he loses by waiting.
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