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Here's Why Shell (RDS.A) Bids Goodbye to Permian Basin

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Royal Dutch Shell plc (RDS.A - Free Report) recently announced an agreement to sell all its assets in the Permian, the most prolific basin in the United States, to competitor ConocoPhillips (COP - Free Report) . The cash transaction is valued at $9.5 billion.

This deal with ConocoPhillips unlocks a significant value for Shell after examining numerous strategies and portfolio choices for its Permian assets. Upon closure, proceeds worth $7 billion from the transaction will be utilized to support additional shareholder dividends with the balance going toward debt reduction.

What’s in the Deal for ConocoPhillips?

The transaction is highly accretive and involves the acquisition of roughly 225,000 net acres in the heart of the core Delaware basin, a sub-basin of the broader Permian. The accord also includes the buyout of operated crude, gas and water pipelines and infrastructure, covering a vast area of approximately 600 miles.

The aforementioned major acquisition is expected to add 200,000 barrels of oil equivalent per day (Boe/d) of production to ConocoPhillips’ portfolio, putting it just behind Exxon Mobil Corporation (XOM - Free Report) , which is likely to produce around 1 million Boe/d from the Lower 48 in 2021. Also, the combined production of ConocoPhillips and Shell’s Permian assets in the second quarter came a close second after Pioneer Natural Resources, beating Chevron Corporation (CVX - Free Report) , per Bloomberg.

Why Did Shell Exit America’s Hottest Shale Play?

Even as late as last year, the Anglo-Dutch oil supermajor had named the Permian as 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 precedents for other oil firms. It ordered the currently Zacks Rank #2 (Buy) Shell to trim its carbon emissions by 45% within 2030 from its 2019 baseline. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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. The company is scheduled to release third-quarter earnings results on Oct 28, 2021. The current Zacks Consensus Estimate for earnings is pegged at $1.39 per share for the to-be-reported quarter.

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Shell has seen its shares surge 61.2% in a year’s time compared with the industry's growth of 59.4%.