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ConocoPhillips continues to expand in the Permian Basin by purchasing Shell Enterprises' $RDS.A Delaware Basin assets for $9.5 bln in cash. $COP is the largest U.S. based independent exploration and production firm based on production volumes. On Jan. 15, 2021, ConocoPhillips closed the $13 bln acquisition of Concho.


conocophillips workers offshore

ConocoPhillips’s purchase of Royal Dutch Shell Plc’s Permian assets will make it the second-largest producer in the world’s top shale basin, according to data from Enverus.

At a time of soaring oil and natural gas priced and the shift by many energy firms towards renewable sources ConocoPhillips has levered up down on crude oil and natural gas. COP annopunced another massive deal, this time with with Shell Enterprises. The deal comes around eight months after completing the $13 bln acquisition of Concho Resources.

ConocoPhillips is placing another massive bet on the Permian Basin by purchasing Shell Enterprises' (RDS.A) Delaware Basin assets for $9.5 bln in cash. With crude oil prices surged by ~75% yr/yr and natural has over 200% yr/yr, the revival comes as economies around the world have reopened and production has fallen. COP has taken view that high prices are sustainable, even. and perhaps in spite of as environmental regulations increase. If correct COP will be well-positioned to capitalize on strong oil and gas markets.

Permian Giants 9 2021

Prior to the Concho acquisition, COP held 170,000 net acres in the Permian Basin. Once this transaction with Shell Enterprises' is completed, the net acreage will expand to nearly 1.0 mln. The acquired assets are estimated to generate 200 MBOED in 2022. COP reported 1,359 MBOED on a year-to-date basis when it issued Q2 results on August 3. A huge positive is that COP doesn't need to borrow to finance this deal with its strong cash flow generation this year.

COP produced $6.3 bln in cash flow from operations during 1H21. Based on a $50/barrel oil price COP believes the addition will be highly accretive to earnings, operating cash flow, return on capital employed, and returns of capital to shareholders versus its prior 10-year operational plan. COP will also ramp up its divestiture efforts to help raise capital for the deal. Specifically, the company lifted its 2023 divestment target to $4-$5 bln from $2-$3 bln.

Shell's sale takes a substantial amount of environmental-related pressure off the table for the European major, who have been pressured by political and activist groups to exit fossil fuels. This past May, a Dutch judge ruled that Shell must cut its carbon emissions by 45% by the end of the decade. This transaction represents a significant step towards achieving that milestone.

Horizontal oil rigs in the Permian +1 to 240 (Baker Hughes) 9/24/21

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Shell is happy with the price received for its Permian assets, despite being in a vulnerable negotiating position due to the court's ruling. Shell's Director of Upstream Operations, Wael Sawan, commented that the deal gives Shell the equivalent of more than a decade's worth of cash flow from the Permian assets.Last year, the Permian assets registered a before-tax operating loss of $(491) mln, but plunging oil prices during the pandemic greatly impaired those results.

It is likely that oil and gas production will remain constrained as more energy companies focus on renewables. Demand should also remain healthy as countries, including the U.S. and China, build out and modernize infrastructure and play catch up.

The deal highlights the contrasting views on the future of energy production with the two sides taken by COP and Shell. For now, it looks like a win-win scenario for both. COP significantly boosts ts production and cash flow generation capabilities, while Shell receives a windfall of cash and reduces its future regulatory/litigation risks.

Conoco’s portfolio includes resource-rich North American tight oil and oil sands assets; lower-risk legacy assets in North America, Europe, Asia and Australia; various international developments; and an inventory of conventional and unconventional exploration prospects. $COP has reloaded portfolio depth in the Bakken and Eagle Ford, and with visibility on future growth from a sizable position in the Permian.

About ConocoPhillips

ConocoPhillips explores for, produces, transports and markets crude oil, bitumen, natural gas, liquefied natural gas (LNG) and NGLs worldwide. Conoco’s portfolio includes resource rich North American tight oil and oil sands assets; lower-risk legacy assets in North America, Europe, Asia and Australia; various international developments; and an inventory of conventional and unconventional exploration prospects.

Source: ConocoPhillips

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