What Do Analysts Think Of Shell's $9.5B Permian Asset Sale To ConocoPhillips?

On Monday, Royal Dutch Shell plc ADR (NYSE: RDS-A) (NYSE: RDS-B) announced a $9.5 billion sale of its entire Permian Basin assets to ConocoPhillips COP. Shares of both stocks traded higher on Tuesday morning, but at least one firm is more bullish on Shell than ConocoPhillips moving forward.

The Analysts: Bank of America analyst Christopher Kuplent has reiterated his Buy rating and $57 price target for Shell. BofA analyst Daniel Lungo also reiterated his Market Weight rating for ConocoPhillips.

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The Theses: ConocoPhillips is acquiring all of Shell’s onshore Texas assets, about 225,000 net acres currently producing about 175,000 barrels per day. Shell will maintain its offshore Texas assets. The $9.5 billion deal is expected to close in the fourth quarter.

On Tuesday, Kuplent said Shell has a lot to gain from the sale, which will reduce the company’s overall carbon footprint by about 1%. At the same time, he said it could unlock value in Shell’s upstream assets while only reducing free cash flow by about 3%.

“We have long argued that Europe's Big Oils — driven by pressure to show near-term progress toward more stringent decarburization targets — are effectively net sellers of all their fossil fuel assets (whether so-called 'core' or not) as long as any exit can balance the corresponding dilution of Group cash flows with visibility on valuation uplift,” Kuplent said.

For ConocoPhillips, Lungo said the deal was the right move, but investors shouldn’t expect a big positive reaction from the stock.

“Overall we view this transaction positively over the medium to longer-term, as it increases the company’s size/scale and reserve base in the lowest cost onshore basin in the US,” Lungo said.

However, ConocoPhillip’s leverage will certainly take a hit, and Lungo expects new issuance in response to the deal.

Benzinga’s Take: The oil and gas industry is in a tricky spot given most industry experts don’t expect the world to hit peak oil demand for roughly another decade. But valuations could remain pressured in that time as investors look to the extremely far long term and a shift in the global energy market to renewable sources.

Photo: Courtesy of Royal Dutch Shell