Shell Won't Buy BP, Should You?

Forbes

26-06-2025

CHINA - 2025/06/22: In this photo illustration, the logo of BP p.l.c. is displayed on the screen of ... More a smartphone. (Photo Illustration by Sheldon Cooper/SOPA Images/LightRocket via Getty Images)
Shell refuted the takeover rumors, yet the speculation emphasizes what investors are beginning to recognize: BP's significant discount and strategic shift might be due for reevaluation.
BP plc stock (NYSE: BP) experienced a jump of as much as 10% intraday on June 25 following a report from The Wall Street Journal indicating that Shell PLC (NYSE: SHEL) is in preliminary discussions to purchase the British oil giant in a deal that could be the largest in the energy sector for decades. Shell promptly rejected the report, but the market's response was telling—BP shares eventually ended up 1.6%, suggesting that investors are reassessing the company's strategic worth and potential for a takeover.
With shares trading around $30 and increasing only 3% this year, BP has lagged behind the S&P 500 and is well behind its U.S. counterparts. However, hidden beneath this modest performance is a complicated situation: a company in strategic transition, possessing a substantial upstream footprint, fluctuating earnings, and a revised energy strategy. With a market capitalization of $80 billion—less than half of Shell's—BP might be more susceptible than ever to merger and acquisition speculation. Nevertheless, if you seek potential gains with a steadier experience than an individual stock, consider the High Quality portfolio, which has outperformed the S&P and achieved >91% returns since its inception. Separately, see – BigBear.ai: What's Happening With BBAI Stock?
M&A Chatter Unlikely – For Now
Notwithstanding the headlines, a complete Shell acquisition of BP remains extremely improbable. For starters, BP holds $60 billion in debt (approximately $27 billion in net debt), a legacy partly stemming from the Deepwater Horizon disaster, which deters financially cautious bidders. In addition, any merger involving two European oil titans would inevitably attract immediate examination from regulators in the U.K., EU, and U.S., particularly concerning dominance in upstream production, LNG, and fuel retailing.
Beyond antitrust concerns, a transaction of this magnitude would elicit political backlash. The U.K. government regards BP as a strategic asset, and endorsing a takeover—even by another British-Dutch entity—could incite nationalist opposition. Merging two global energy giants with differing strategies would also introduce operational challenges.
A more feasible outcome? BP could be dismantled and sold in parts to various buyers. This route would be easier to navigate legally and might release more value than a massive merger.
Valuation: A Discount?
From a valuation perspective, BP appears appealing. The stock is trading at a price-to-sales ratio of merely 0.44x—roughly 20% to 30% lower than its five-year average. In comparison, integrated oil firms like Exxon Mobil (NYSE: XOM), Chevron Corporation (NYSE: CVX), and Shell attract significantly higher P/S ratios ranging from 0.7x to 1.3x. The discount indicates investor apprehension regarding BP's evolving strategy, declining earnings, and structural obstacles. Nonetheless, it also provides the possibility of upside if execution stabilizes. Refer to our analysis BP Valuation for additional insights into what is influencing our price estimate for the stock.
Quarterly Struggles, Long-Term Promise
Q1 results illuminated BP's internal conflict. Oil production and operations produced solid profits due to increased volumes and pricing. However, gas trading and low-carbon ventures faltered, dragging down overall performance. The company reported an underlying replacement cost profit of $1.38 billion, falling short of the $1.6 billion consensus and a significant decrease from $2.7 billion the previous year.
Looking forward, production is anticipated to decline in 2025 due to asset divestitures, while refining margins and currency headwinds continue to exert pressure. Still, BP has three new startups and six discoveries in development, presenting growth potential if it can stabilize its performance.
Strategy Shift: Back to Black Gold
After years of fluctuating between green ambitions and fossil fuel fundamentals, BP is recalibrating its direction. In 2020, the company committed to a 40% reduction in oil output and to take a leading role in renewables. However, lackluster returns and increasing pressure from shareholders have reversed that commitment.
Currently, BP is intensifying its focus on oil and gas, aiming for 2.5 million barrels of oil equivalent per day by 2030—up from just under 2.4 million last year. Concurrently, it has cut renewable spending from $5 billion to as low as $1.5 billion annually and increased traditional capital expenditures to $10 billion. Changes in executive roles—most notably the upcoming departure of Giulia Chierchia, EVP of strategy and sustainability—further indicate a definitive shift back to hydrocarbons.
Hydrogen Plays Still On the Table
Despite scaling back on renewables, BP continues to engage in hydrogen initiatives. Its pipeline includes joint ventures with Iberdrola in Spain and Cummins in Germany, along with H2Teesside—one of the U.K.'s largest planned blue hydrogen production sites. These initiatives suggest that BP isn't entirely relinquishing its energy transition goals but is rather refocusing on technologies with more immediate economic potential.
The Bottom Line: Merger Unlikely, Value in Focus
Although a Shell–BP merger may capture headlines, it realistically faces too many obstacles—regulatory, political, and financial—to become a reality anytime soon. Still, the speculation underscores something far more significant: BP's depressed valuation and strategic uncertainty are attracting renewed interest.
For value-minded investors, BP might present upside—provided that the company successfully implements its renewed oil-centric strategy and regains margin confidence.
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