What's going on?
According to reports on Tuesday, Anglo-Dutch oil giant Royal Dutch Shell is in talks to buy American oil producer Endeavor Energy Resources for $8 billion. It’s the latest rush on the West Texas oil fields…
What does this mean?
Endeavor’s key attraction is the 300,000 acres of mostly undrilled land it owns in the booming Permian Basin. It’ll take a lot of investment to extract the region’s shale oil – but it’s forecast to be one of the world’s largest oil-producing areas by 2023. Shell’s already active in them thar hills, so Endeavor could be a neat addition.
Endeavor put itself up for sale in October, initially hoping to go for $15 billion – but the company’s billionaire founder insisted on getting a cut of any future oil drilled on its land. That made for a cheaper price than expected – but may have put off potential suitors ExxonMobil and Chevron.
Why should I care?
The bigger picture: Oil’s price is still falling.
The price of a barrel of oil fell 7% on Tuesday, dragging with it shares of oil producers, including Shell: lower prices mean lower profits. Last month’s oily slip ’n’ slide was largely down to supply outstripping demand, softened somewhat by subsequent agreements to lower production. This time, though, investors may fear demand could be weaker than predicted, particularly from China. The country’s president failed to offer details of plans to revitalize the country’s lackluster economy in a high-profile speech on Tuesday.
For markets: Shell’s stock sludged.
Shell’s falling stock price may also suggest investors weren’t thrilled by its latest endeavor. Integrating a bought business is a challenge, and there’s a risk the hoped-for synergies fail to materialize. But Shell’s got history on its side. In 2016, the company bought BG Group for $70 billion – and almost immediately started trimming the fat in order to reduce debt while maintaining a healthy dividend. By last quarter, cost-cutting (combined with decently high oil prices) delivered Shell a higher-than-expected profit.