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Shell is playing down reports that it is considering a bid to acquire its struggling rival and fellow UK major BP. The laggard among the five listed Western oil majors, BP鈥檚 current stock market valuation of around $75 billion represents an opportunity for any suitor to buy upstream, integrated gas and downstream positions across the world for a knockdown price. And, with $35.6 billion of cash on its books and readily available credit lines, Shell 鈥� for all its recent talk of prioritizing repurchases of its own stock 鈥� is in a position to pull off a transformational deal. Its UK rival is not only saddled with lingering Macondo liabilities and $27 billion of net debt but is also failing to convince with quarterly earnings. Would its asset base have great appeal to a reset Shell that has repeatedly talked of a high bar for acquisitions? Here, we look at what Shell would stand to gain 鈥� and lose 鈥� from a British oil and gas megamerger.

• BP has many upstream assets that Shell may covet 鈥� and complement.

Asked what BP鈥檚 competitive advantage is now following its February strategy reboot, CEO Murray Auchincloss鈥� first answer was that the company has 鈥渙ne of the best upstreams around.鈥� Its 2024 production of 2.36 million barrels of oil equivalent per day was around 17% below Shell鈥檚, whose output would top the 5 million boe/d mark if it bought BP. That would catapult it above Exxon Mobil, which produces around 4.5 million boe/d now but plans to reach 5.4 million boe/d by 2030.

BP may no longer have the once-prized 19.75% stake in Russian oil giant Rosneft on its books, but the UK company retains strong positions in the US 鈥� mainly in the Gulf of Mexico and lower 48 鈥� where it aims to be producing 1 million boe/d by 2030. Taking over BP would create synergies with Shell鈥檚 own Gulf of Mexico assets and see Shell return in a big way to the US onshore, having sold its Permian assets to ConocoPhillips for $9.5 billion in 2021. BP's "exploration hopper" would also give Shell's upstream runway more length. BP wants to restore its reserve replacement ratio to 100% by the end of 2027, and a recent discovery by its Azule Energy joint venture with Eni could tempt Shell to have another shot at commercial success offshore Namibia after recent exploration well write-offs there.

Auchincloss also stressed BP鈥檚 strong position in the Middle East, where it has access to 3 billion barrels of oil equivalent of resource at Iraq鈥檚 Kirkuk field, as well as gas assets in Egypt, where Shell operates the Idku liquefaction plant. Still, there are "question marks on whether Shell would want BP's positions in [places] like Azerbaijan, India, Iraq and Abu Dhabi,鈥� RBC Capital Markets said in a note this week. Last year, BP and Shell both farmed into Abu Dhabi's Ruwais LNG plant, taking 10% each.

• Buying BP would cement Shell鈥檚 position as a global LNG leader.
  

At its recent Capital Markets Day, Shell announced a revised way forward, setting out plans to put LNG at the forefront of its transition strategy and to increase LNG sales by 4%-5% per year through 2030. Buying BP would 鈥� at a stroke 鈥� help Shell achieve and easily surpass that target. Shell, the leading Western LNG player, sold just under 66 million tons of LNG in 2024 and would top 100 million tons with the addition of BP鈥檚 37 million tons. The total volume would represent more than the US, now the world's top LNG producer, exported last year and would put Shell well ahead of its closest oil company rivals, such as TotalEnergies. Acquiring BP's LNG portfolio, which is also slated to grow, would also 鈥減ropel Shell back to >20% market share in LNG,鈥� RBC said 鈥� a level the company has not enjoyed since the immediate aftermath of its 2016 acquisition of BG Group.

• But BP鈥檚 downstream and renewables businesses don't hold much appeal.

Shell and BP鈥檚 latest low-carbon strategies are going in similar directions. Both are leaning back into oil, gas and LNG and advocating a capital-light approach to renewables. Indeed, neither company is bullish on any transition business at present. BP doesn鈥檛 expect its biggest bet on the transition in the past decade 鈥� its $4.1 billion purchase of US biogas producer Archaea 鈥� to turn cash flow positive until next year, and it is difficult to imagine Shell wanting increased exposure to that business after its own underwhelming $2 billion acquisition of Europe鈥檚 biggest biomethane producer, Nature Energy, in 2022.

Both companies are whittling down their refining and chemicals footprints to focus on core sites. BP has around 700,000 barrels per day of oil refining capacity in the US, spread across two sites in Whiting, Indiana, and Cherry Point, Washington, as well as refineries in the Netherlands (Rotterdam), Castellon in Spain, and Lingen and Gelsenkirchen in Germany, the last of which is up for sale. Shell has had its own difficulties selling a refinery in Germany as it seeks to focus on just four energy and chemicals parks globally.

Both companies have talked about the importance of the integrated nature of these assets with their respective trading businesses 鈥� and the potential boost to earnings from trading. But with BP鈥檚 products refining and trading business eking out a pretax profit of just $13 million in the first quarter, it is unlikely to have Shell executives excited. 鈥淏P is the main major exposed to weaker light-heavy [crude price] spreads 鈥� and tightness in this spread has weighed on earnings for BP鈥檚 refining segment,鈥� RBC said.

• Shell would need BP to be greatly streamlined to really add value.

Under pressure from activist investor and 5% shareholder Elliott Investment Management, BP has started a divestment program targeting $20 billion of proceeds by 2027, with the sale of lubricants business Castrol and a stake in solar unit Lightsource BP likely to be among the first to be concluded. But BP would need to be much leaner to avoid diluting Shell鈥檚 value, analysts say. 鈥淚 don鈥檛 see any merit in it [the rumored acquisition] unless Shell thinks they can asset strip鈥� and keep some of the good oil and gas assets while shedding the renewables, said Panmure Liberum analyst Ashley Kelty.

Investors have given their early verdict on the takeover rumors, with Shell鈥檚 shares slipping 1.8% on May 6 鈥� the first day of trading in London after a long holiday weekend 鈥� while BP鈥檚 shares rose by 1.3%.