Shell has entered into an agreement to acquire ARC Resources for $16.4bn, with $10.2bn payable through the issue of new Shell shares and the balance in cash and assumed liabilities.
The deal is expected to close in the second half of this year subject to the customary approvals.
On completion, the transaction is expected to immediately boost production by the equivalent of 370,000 barrels of oil per day. As a result, Shell’s targeted production out to 2030 has increased from 1% to 4% per annum, over 2025 levels.
The shares were down 2.2% following the announcement.
Our view
On first glance, Shell’s move to acquire Arc Resources makes sound strategic sense. However, at about 15 times Arc’s expected earnings, the price tag looks reasonably full, and the market responded with some caution.
The deal provides an uplift to production while meeting the company’s criteria for organic investment, without the development risk that goes with new oil wells. Shell’s existing nearby Canadian acreage should help with integration.
Meanwhile, the potential to support Liquefied Natural Gas (LNG) volumes, in the wake of damage to Shell’s own production facilities in Qatar, is an added benefit.
Shell’s market leadership in LNG is one point of differentiation against the peer group, and one that may benefit from growth drivers such as growing power demand from Artificial Intelligence. The company’s ability to trade its own output as well as third-party supplies leave it well placed to prosper in volatile times. But Qatar’s attractive production costs are difficult to match, and there are some longer-term concerns around the viability of LNG.
In distribution, Shell is particularly well placed to provide lower-carbon options to motorists. Its global network of 47,000 service stations is the largest of all the oil majors. Its EV charging footprint has been growing rapidly, but the focus is changing to profitability rather than scale.
Shell invests over $20bn each year across its business, and that’s set to stabilise at between $20-22bn out to 2028. Outside of the Arc deal, new projects are expected to deliver over 1 million extra barrels of production per day by 2030. But as with all natural resource developments, there’s the potential for things to go wrong.
A strong balance sheet and renewed efficiency drive underpin generous distributions to shareholders. Currently, that’s allowing annual dividend increases of 4% and continued buybacks of around $3.5bn per quarter. That could go higher if there’s a sustainable increase in profitability, but no payouts can be guaranteed in future quarters.
Like the rest of the sector, Shell’s fortunes remain linked to movements in commodity prices. However, strong cash generation, a relatively robust balance sheet, and a well-run trading division mean we think it’s relatively well placed to cope with some volatility in the oil price.
The Iran War has driven up oil prices, and with it, Shell’s valuation. We think prices could remain elevated for some time, which supports recent increases to this year’s profit forecasts.
The valuation looks about right to us. Further out estimates don’t look too aggressive, leaving some room on the table for upside if Shell executes well and commodity prices remain favourable. However, today’s geopolitics are highly unpredictable, and investors should be prepared to tolerate relatively high levels of risk.
Environmental, social and governance (ESG) risk
Environmental concerns are the primary driver of ESG risk for oil and gas producers, with carbon emissions and waste disposal being the main issues. Health and safety, community relations and ethical governance are also contributors to ESG risk.
According to Sustainalytics, Shell's management of material ESG issues is strong.
This reflects a change in its business mix over recent years towards lower carbon fuels such as gas and LNG, and the exit from some of its more controversial assets. Despite Shell's numerous environmental and social targets, the company's impact on the environment and society remains relatively high. The decision to hold oil production steady till the end of the decade is likely to be met with some disappointment.
Controversies relating to environmental degradation, bribery and corruption, and community relations continue to play an important role in how Shell is perceived globally, as well as its financial disclosures around its renewables business.
Shell key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.