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Royal Dutch Shell Is Looking to Bulk Up Its Position in the Permian Basin

By Matthew DiLallo – Updated Apr 12, 2019 at 6:51PM

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The global energy giant is trying to keep up with its big oil peers.

The Permian Basin is quickly becoming one of the best oil and gas resources in the entire world. As a result, energy companies have flocked to the region, spending billions of dollars to lock up drillable land. These purchases provided the buyers with significant resources, which should give them plenty of fuel to grow production at a fast pace over the next several years.

While Royal Dutch Shell (RDS.A) (RDS.B) owns a sizable position in the Permian, it lacks the same scale of rivals ExxonMobil (XOM 2.19%) and Chevron (CVX 1.02%), which expect the region to be a major growth driver. Because of that, the company is currently looking to make an acquisition to bulk up its Permian position so it can participate in that growth.

Oil Industry Pump jack with one oil worker and laptop.

Image source: Getty Images.

Drilling down into Shell's foray into the Permian

Shell was one of the early buyers of Permian land as it scooped up more than 600,000 net acres from Chesapeake Energy for nearly $2 billion in 2012. As part of the deal, Shell inherited Anadarko Petroleum (APC) as a 50-50 partner. While the two feuded in the past, they've since reconciled and are now working together to develop this acreage.

However, because the company shares this position with Anadarko, it doesn't have the control, nor the scale, that big oil rivals Chevron and Exxon have in the region. Further, both of those peers already had sizable Permian positions before the recent land rush, which each has since bolstered. Chevron, for example, bought another part of Chesapeake's Permian position in 2012, while Exxon doubled its regional resource base in 2017 after paying $5.6 billion for privately held Bass.

Check out the latest earnings call transcript for Royal Dutch Shell.

On the prowl for more land

Shell has been looking to make a deal in recent years so that it can follow its peers in bolstering its Permian position. The company reportedly bid on BHP Group's U.S. shale assets that included land in the Permian but lost out to BP, which paid $10.5 billion for most of BHP's acreage. Shell was also reportedly close to spending $8 billion for privately held Endeavor Energy Resources, which also drew interest from Exxon, Chevron, and ConocoPhillips. However, a big slump in oil prices and issues with the deal terms have seemingly put that transaction on ice.

Still, Shell appears very eager to seal a deal for more land in the Permian. "We are definitely actively looking at opportunities," stated Wael Sawan, the soon-to-be head of the company's upstream division, at a recent industry conference. Sawan further commented that "If none ever come up then that's a disappointing outcome." However, Sawan cautioned that "We're not going to jump into an opportunity because we need to bulk up the Permian," since the company needs to "find a deal that works for the buyer and the seller." Shell certainly has plenty of targets outside of Endeavor Energy Resources since there are dozens of both public and private companies operating in the region, so it can be patient for the right deal to come along. 

Seeking shale scale to supercharge shareholder returns

Because of Shell's massive size, its smaller-scale Permian Basin position isn't moving the needle for the company. That's why Shell wants to bulk up -- so it has the scale necessary to produce meaningful growth from the region, like rivals Exxon and Chevron. If Shell can find the right deal for the right price, that would increase its ability to create value for its investors over the next several years, making it an even more compelling opportunity.

Matthew DiLallo owns shares of BHP Group Ltd. and ConocoPhillips. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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