Shell on Prowl for Permian Deals as Majors Make Shale Play

Royal Dutch Shell Plc is on the hunt for deals to bulk up its position in the Permian Basin, where it lags rivals Exxon Mobil Corp. and Chevron Corp.

“We are definitely actively looking at opportunities,” Wael Sawan, Shell’s deepwater boss, said in an interview on the sidelines of IHS Markit’s CERAWeek conference on Monday. “If none ever come up then that’s a disappointing outcome.” Sawan is set to lead the European supermajor’s entire upstream division in July.

Shell is considering a bid for Endeavor Energy Resources LP, one of the Permian’s largest-private operators, people familiar with knowledge of the matter said earlier this year. Sawan declined to comment on that or any specific targets but said any purchase would have “to afford our shareholders a very strong return on investment.”

Exxon and Chevron last week announced audacious plans to produce nearly 2 million barrels of oil between them from the Permian by the mid 2020s, more than OPEC member Nigeria. While the two U.S. explorers emphasized organic growth, Shell is looking for takeovers to take advantage of smaller drillers squeezed by cost pressures and investors hungry for returns.

Shell currently produces 145,000 barrels of oil equivalent a day from its existing Permian operations and plans to increase production by 30 percent a year for the forseeable future, the company’s U.S. President Gretchen Watkins said in an interview. Shell’s overall shale production, which includes Argentina and Canada, will reach half a million barrels a day by 2020.

The key difference between Shell and its Permian rivals is that the major is already cash-flow positive in the basin.

“We’re very firmly in the black now and starting to return cash to the company,” she said. Cash will grow “at an ever increasing rate going forward.”

By contrast, Chevron has said its Permian business won’t become cash-flow positive until next year while Exxon is targeting 2021. Shale has proven to be an easy way to grow production, but returning cash to shareholders has eluded most operators.

Though the Shell executives admit the company’s position in the world’s largest shale basin is too small for a company of Shell’s size and ambition, they won’t jump into a deal without the right financial return.

“We’re not going to jump into an opportunity because we need to bulk up the Permian,” Sawan said. There’s a “question mark on whether we’ll find a deal that works for the buyer and the seller.”