Shell investors get surprise $7 billion payout on shale deal

Permian basin Source: iStock/Jasmin Pawlowicz

Royal Dutch Shell plc shareholders will get an unexpected $7 billion payout after the company promised to give them three quarters of the proceeds from the sale of Permian shale oil fields to ConocoPhillips. 

The cash pledge comes less than two months after Shell raised its dividend by almost 40 per cent and started $2 billion of share buybacks. It’s more evidence that the energy giant is working hard to regain the faith of investors after making a historic cut to its payout last year in the depths of the COVID-19 pandemic. 

“For investors elsewhere, a divestment immediately allocated into a buyback to the tune of $7 billion, with balance sheet strengthening on top, is rare,” analysts from Bernstein Research said in a note. It “proves without any doubt that Shell are focused on winning shareholders back.”

Shell’s Class B shares jumped 4.3 per cent to 1,492 pence by 11:19 a.m. in London. 

Of the $9.5 billion Shell will receive from Monday’s sale of the Permian, $2.5 billion will go toward debt reduction. For the remainder, “the base case is for that to go as share buybacks,” Wael Sawan, Shell’s upstream director, said in an interview after the deal was announced on Monday. 

The final decision will be made by the company’s board, likely in the fourth quarter when the transaction formally closes, he said. The $7 billion payout will be in addition to the company’s prior pledge to distribute 20 per cent to 30 per cent of cash flow from operations to investors, Shell said in a statement. 

Shareholder returns

The world’s top oil producers and U.S. shale explorers have increasingly focused on shareholder returns over growth, following years of expansion. Oil prices near the highest level in three years have provided them with abundant cash to do that. 

“Being able to transact with a healthy, robust oil price compared to where it has been in the last few years, and in a market that is hotly consolidating at the moment, is a prudent opportunity for us to grab,” Sawan said. The deal gives Shell the equivalent of more than a decade’s worth of cash flow from the Permian assets, he said. 

The deal will give ConocoPhillips additional daily production in 2022 of about 200,000 barrels of oil equivalent, it said Monday in a statement. That will make the Houston-based company one of the Permian’s biggest producers.

“The exit holds sound rationale, with the Permian increasingly detached from Shell’s long-term strategy, providing a key cut in emissions (methane) exposure.” – Will Hares, Bloomberg Intelligence global energy analyst.

In Shell’s hands however, the Permian operations were “sub-scale,” Sawan said. “To truly unlock the full value of an asset like this you need the scale.” 

Shell’s retreat from the Permian comes as the Anglo-Dutch giant reconfigures its strategy in favor of less carbon-intensive fuels while targeting net-zero emissions. Shell was ordered by a Dutch court in May to slash emissions harder and faster than planned after losing a case against an arm of Friends of the Earth. 

© 2021 Bloomberg L.P.

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