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Shell (RDS.A) Ends Permian Asset Sale, Begins Stock Buyback

·5-min read

Royal Dutch Shell plc’s (RDS.A) subsidiaryShell Enterprises LLCrecently announced the completion of the sale of all its assets in the Permian, the most prolific basin in the United States, to competitor ConocoPhillips COP.

The divesture worth $9.5 billion, announced in September 2021, involves Shell's 225,000 net Permian acres with current production of nearly 175,000 barrels of oil equivalent per day. The divested assets involve 600 miles of operated oil, natural gas, water pipelines and other energy infrastructure. The acquisition makes ConocoPhillips one of the leading producers in the Permian Basin.

For Shell, the asset sale was a more attractive option for its shareholders instead of acquiring additional assets to boost its Permian footprint. RDS.A planned to use the cash proceeds from the transaction to fund $7 billion of additional shareholder distributions, most likely through share repurchases. The distributions were expected in addition to RDS.A's shareholder distributions of 20-30% of cash flow from operations. The remaining amount was intended to be used in strengthening RDS.A's balance sheet.

Shell’s Stock Buyback Commencement

With the closure of the Permian asset divestment, management announced that it will buy back up to $1.5 billion of shares from Dec 2, 2021 to Jan 28, 2022. This will be the first instalment of the $7-billion dividends due to its shareholders following the sale of Shell's Permian operation to COP. In early 2022, the form and the date for releasing the remaining $5.5 billion will be disclosed.

What Makes ConocoPhillips' Permian Acquisition So Special?

The Permian assets acquisition will help COP generate massive cash in the coming days. It expects to generate $1.9 billion of free cash flow in 2022. Rising cash from operations owing to the deal will help COP provide higher returns to its shareholders, in line with its plan to return 30% cash from operations to its shareholders.

ConocoPhillips' Permian footprint expanded significantly over the past year. Due to the changing perspectives on fossil fuels, oil and gas producers were often skeptical about focusing on hydrocarbons. The shifting approach among the industry's leading producers created opportunities for ConocoPhillips, which remains more aligned with regular oil and gas production.

Why Did Shell Exit America’s Hottest Shale Play?

Even last year, the Anglo-Dutch oil supermajor had named the Permian one of its key oil and gas-producing locations. However, it is under tremendous pressure to expedite its departure from fossil fuels.

In May, the District Court in The Hague issued a major verdict on a climate dispute brought forth by environmentalists that might set a precedent for other oil firms. It ordered Shell to trim its carbon emissions by 45% within 2030 from its 2019 baseline.

The Permian asset divestment underlines the growing divide between the European oil firms like Shell, BP and TotalEnergies, which are striving to shift toward renewable energy and low-carbon power, and their American counterparts, who continue to rely on oil and gas as a long-term investment.

Shell belongs to a global group of energy and petrochemical companies. It is involved in all phases of the petroleum industry, right from exploration to final processing and delivery. RDS.A is scheduled to release fourth-quarter 2021 earnings results on Feb 3, 2022. The current Zacks Consensus Estimate for earnings is pegged at $1.59 per share for the December quarter.

Zacks Rank & Key Picks

Shell currently has a Zack Rank #3 (Hold). Investors interested in the energy sector might look at the following stocks worth considering with a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Range Resources Corporation RRC, based in Fort Worth, TX, is an independent energy company that engages in exploring, developing and acquiring oil and gas properties, primarily in the Appalachian Basin and North Louisiana. RRC is among the top 10 natural gas producers in the United States. It is among the top NGL producers in the domestic market. As of 2020 end, RRC’s total proved reserves were 17.2 trillion cubic feet equivalent.

In the past year, shares of Range Resources’ have increased 169.7% compared with the industry’s growth of 102.3%. In the past 60 days, the Zacks Consensus Estimate for RRC's 2021 earnings has been raised 24%. RRC’s 2021 earnings are expected to surge 2,511.1% from the year-ago reported figure. RRC has witnessed five upward estimate revisions in the past 30 days.

Occidental Petroleum Corporation OXY is an integrated oil and gas company with significant exploration and production exposure. OXY is also a producer of a variety of basic chemicals, petrochemicals, polymers and specialty chemicals. As of 2020 end, Occidental Petroleum's preliminary worldwide proved reserves totaled 2.91 billion BOE compared with 3.9 billion BOE at the end of 2019.

In the past year, shares of Occidental Petroleum have surged 99% compared with the industry's growth of 96.6%. OXY's 2021 earnings are expected to soar 151.4% from the year-ago reported figure. Occidental Petroleum has also witnessed eight northward estimate revisions in the past 60 days. In the third quarter, OXY achieved its planned divestiture target of $10 billion by inking a deal to sell its interest in two offshore Ghana assets for $750 million.


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