The BP (LSE: BP.) share price gained 7.2% at one point Wednesday (25 June) on rumours that Shell (LSE: SHEL) had made an approach that could create a £200bn UK oil giant.
The excitement faded after a Shell denial the next day. And at the time of writing, both are down around 3.8% on the week.
Talk is getting louder again that BP could be a juicy takeover target. Its valuation still suffers from its perilous — and now shelved — net-zero policy.
Shell issues firm denial
On Thursday (26 June), Shell said: “In response to recent media speculation Shell wishes to clarify that it has not been actively considering making an offer for BP and confirms it has not made an approach to, and no talks have taken place with, BP with regards to a possible offer.“
It added it “has no intention of making an offer.” By UK takeover rules, that means a deal is off for at least the next six months.
Quoted in The Telegraph, one investor opined that “the genie is out of the bottle now,” describing BP as “an attractive asset for Shell because there’s a lot of synergies“. The unidentified shareholder added: “The market didn’t expect Shell to do it now because they still have cost-cutting plans, but they’re getting to the end of those.”
How they square up
If BP is supposed to be the target and Shell the pursuer, BP must be on a lower valuation, right? Well, judging by forecasts it’s not at all obvious that’s the case.
Analysts put BP shares on a forward price-to-earnings ratio of 11.5 for the current year. That drops to 8.5 by 2027 with strong earnings growth on the cards. And it does look good value to me.
But if anything, Shell looks even cheaper. A 2025 P/E of 11 is predicted to fall to 8.2 in the same timescale. BP’s superior 6.6% forecast dividend yield might swing it that way, with Shell’s at 4.1%. But there isn’t much in it.
International interest
Shell would have the upper hand simply by being close to three times the size. But it does raise the question of whether other global oil companies might have BP in their sights. Or even be looking at Shell.
AJ Bell analyst Dan Coatsworth has suggested possible suitors could include Saudi Aramco, Exxon Mobil, or Chevron.
But what does this all mean for private investors? I do see a reasonable chance for some consolidation in the oil sector. And a takeover can mean a nice payday.
Buyout bonus
But I think investors should look at BP and Shell only with a view to holding for at least 10 years. And then any buyout premium would be a bonus. With that view, the long-term threat to the oil and gas business means we still need to be cautious.
I’m wary of the risk of investing in an industry approaching the end of its days. But that could still be a long way away. And right now I reckon BP and Shell are both worth considering — on their own merits.
