As energy transition plays out, Shell exits Permian with $9.5 bln sale to ConocoPhillips

Oil major Shell is exiting its Permian Basin business in the U.S. through a $9.5 billion deal with ConocoPhillips. Shell’s move is in line with efforts to shift its focus on the energy transition while ConocoPhillips believes the deal will enable it to play a valued role in the transition through the addition of more low GHG intensity barrels to the mix.

Shell has reached an agreement for the sale of its Permian business to ConocoPhillips for $9.5 billion in cash. The transaction will transfer all of Shell’s interest in the Permian to ConocoPhillips, subject to regulatory approvals.

Wael Sawan, Shell’s Upstream Director, said: “After reviewing multiple strategies and portfolio options for our Permian assets, this transaction with ConocoPhillips emerged as a very compelling value proposition. This decision once again reflects our focus on value over volumes as well as disciplined stewardship of capital”.

According to Shell, its Upstream business plays a critical role in the Powering Progress strategy through a more focused, competitive and resilient portfolio that provides the energy the world needs today whilst funding shareholder distributions as well as the energy transition.

Like many European majors, Shell is under pressure from its investors to move away from oil production and focus on renewable sources of energy like solar and wind.

Shell has already committed to becoming a net-zero company by 2050 and its energy transition strategy entails investments in lower-carbon energy, including electric vehicle charging, hydrogen, power from wind and solar energy, and biofuels. The company is also participating in a Dutch carbon capture and storage project named Porthos.

The cash proceeds from the transaction with ConocoPhillips will be used to fund $7 billion in additional shareholder distributions after closing, with the remainder used for further strengthening of the balance sheet.

Shell’s Permian business includes ownership in approximately 225k net acres with current production of around 175 thousand barrels equivalent per day. The transaction is expected to close in 4Q 2021. The majority of Midland-based Permian employees and many Houston-based employees will be offered employment by ConocoPhillips.

Shell noted that, since 2017, the company’s Permian operations have reduced greenhouse gas and methane intensity by 80 per cent through investment in infrastructure and technology.

Once the deal has been completed, Shell’s oil and gas production in the U.S. will almost completely consist of offshore assets in the Gulf of Mexico.

In a separate statement on Monday, ConocoPhillips said the deal is consistent with the company’s financial framework, its stated capital allocation priorities, and its commitment to playing a valued role in the energy transition.

In conjunction with this transaction, ConocoPhillips also announced it will improve its Scope 1 and 2 GHG emissions intensity reduction targets. The prior 2030 reduction target of 35-45 per cent on a gross operated basis will be increased to 40-50 per cent, versus a 2016 baseline, on both net equity and gross operated basis.

Ryan Lance, ConocoPhillips chairman and CEO, said: “In addition to enhancing our base plan, this transaction also enhances our ability as an E&P company to have a valued role in energy transition by accelerating progress on our Triple Mandate. The objectives of the mandate are to responsibly produce energy to meet transition demand, generate compelling returns on and of capital, and achieve our Paris-aligned targets and 2050 net-zero ambition.

“The assets we’re adding are consistent with our low cost of supply strategy, which is designed to position our portfolio as the most likely to be developed as the energy transition progresses and the need for oil and gas is reduced over time. The assets we’re adding improve our ability to generate returns that are consistent with what investors demand through cycles. And the assets we’re adding will bring more low GHG intensity barrels to our mix. This deal hits on all the objectives of our mandate”.

To help pay for the deal, ConocoPhillips is increasing its divestment targets from $2-3 billion to $4-5 billion by 2023. The incremental $2 billion of planned dispositions are expected to be sourced primarily from the Permian Basin as part of the company’s ongoing portfolio high-grading efforts. Proceeds will be used in line with the company’s priorities, including returns of capital to shareholders and reduction of gross debt.

ConocoPhillips also announced an increase in the company’s quarterly ordinary dividend from 43 cents per share to 46 cents per share, representing a ~7 per cent increase and a current dividend yield of 3 per cent.

Lance also said: “Everything we do is in service to delivering superior returns to shareholders through cycles while continuously lowering our emissions intensity, especially as the energy transition plays out.

“The opportunity to announce a very attractive acquisition in conjunction with an ordinary dividend increase and an improved emissions intensity reduction target speaks to the strength of our company and a clear commitment to delivering on all aspects of our Triple Mandate. We’re again building upon our competitive advantages and our unbeatable combination of resilience, returns and ESG excellence. That’s the combination it will take to adapt, thrive and win in the new energy future”.