Could a Shell–BP merger really work? It depends on how much risk Shell wants to take

Talk of a mega-merger between Shell PLC (LSE:SHEL, NYSE:SHEL) and BP PLC (LSE:BP.) is heating up.

With whispers on the Bloomberg wire and analysts poring over spreadsheets, the debate is no longer whether a tie-up could happen, but whether it should.

At a time when oil majors are scrambling to prepare for both the next upcycle in fossil fuels and the long march to decarbonisation, the strategic logic of combining two of the UK’s energy giants might appear sound. However, the financial case looks far less compelling.

That is the central tension now facing Shell, according to a note from JP Morgan. The company has been tipped as a natural consolidator in the sector, and absorbing BP would certainly create a global heavyweight to rival ExxonMobil or Saudi Aramco.

Yet the numbers suggest that Shell would need to pay a premium and take on significant risk to make the deal stack up.

What does Shell get, and at what cost?

The strategic rationale for an acquisition of BP rests on four pillars: stronger oil production into the 2030s, more firepower in trading, greater flexibility in navigating the energy transition, and a lower overall cost of capital.

On paper, BP offers pieces of each. Its upstream portfolio, especially in the Gulf of Mexico and West Africa, is still competitive. Its trading division is a known strength.

It has a more advanced renewables pipeline than Shell. At current valuations, its shares trade at a discount, which is a temptation for any potential buyer.

However, while BP brings complementary assets, it also carries baggage. The group’s credit rating is lower, its emissions targets more aggressive, and its recent performance less convincing.

For Shell shareholders to see value, the transaction would need to deliver clear gains in free cash flow per share, ideally pushing above Shell’s current 10% compound growth target through 2030.

Modelling a potential deal using different funding mixes tells a cautionary tale, according to analysis carried out by JP Morgan.

With a 20% premium to BP’s current share price and expected post-tax synergies of around $3.5 billion annually, Shell could just about achieve 13–14% annualised free cash flow growth using a mix of cash and equity.

That is decent, but hardly transformational. A 100% equity-financed deal, meanwhile, would deliver no better than the status quo.

More upside, more risk

To move the needle meaningfully, Shell would likely need a deeper discount on the purchase price, a larger share of the deal in cash, or synergies well above the current estimate. Each comes with trade-offs, the American bank reckons.

A bigger cash component increases financial leverage, just as investors are watching debt levels more closely. Pushing for more synergies raises execution risk. Waiting for BP’s price to fall adds uncertainty.

Shell’s current appeal rests in its ability to generate high returns from oil and gas without overextending itself, benefiting from market volatility while keeping capital discipline tight. That is not the profile of a company eager to gamble.

A Shell–BP merger could yet happen. However, unless the terms shift more clearly in Shell’s favour, it is a hard sell to those watching the bottom line.

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