Shell's Canada deal only partly aids its key issue

ARC Resources

27/04/2026 16:41

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Yawen Chen

LONDON, April 27 (Reuters Breakingviews) - Shell's SHEL.L $16 billion grab for ARC Resources ARX.TO initially reads like a neat answer to an awkward question: how to keep oil and gas production growing faster to capture higher energy prices, without blowing up a disciplined capital framework. The $250 billion UK group says its new Canadian deal, announced on Monday, adds 370,000 daily barrels of oil equivalent to its 2.8 million barrel-a-day output, and means its oil and gas production will grow at 4% a year through 2030 versus 2025, rather than the previously flagged 1%. A 2% dip in Shell's share price suggests investors rightly see the fix as partial, though.

The price Shell boss Wael Sawan is paying isn't really the problem. He is offering ARC a 27% premium to its last closing price — funded 25% in cash and 75% in stock, and taking on roughly $2.8 billion of net debt. He also assumes $250 million of annualised synergies. Using analyst forecasts compiled by Visible Alpha of $1.6 billion for ARC operating profit in 2028, plus post-tax synergies of roughly $190 million and a 23% tax rate, ARC net operating profit after tax should be around $1.4 billion. That's roughly an 8% return on the $16 billion enterprise value — only marginally above Morningstar's 7.3% cost of capital estimate for the target.

A bigger snag is the molecule mix. Shell's main long-term problem has been a relative dearth of long-term oil reserves. The group says its latest deal supports "material liquids production" of about 1.4 million daily barrels "towards 2030 and beyond," and adds some 2 billion barrels of oil equivalent to reserves. But 60% of ARC's production is gas, which since a landmark deal with BG Group a decade ago Shell already has a lot of.

That still means 40% of ARC's long-duration, low-cost "Montney shale" is liquids. But these are often so-called condensate and non-gas liquids rather than crude oil. That's not undesirable — and carries lower carbon emissions than the Canadian oil sands Shell sold out of in 2017. But it's not the same as fixing a post-2030 oil decline, at a time when prices of the black stuff are soaring due to the closure of the Strait of Hormuz. ARC has its own outstanding issues, too: the producer suffered a sharp stock decline in February following disappointing production results at its Attachie project.

Sure, ARC buys Shell time just as Sawan is under pressure, and represents a production fix of sorts. But while his company's market value is up by a fifth this year, its stock has still underperformed rival oil majors. In that sense, paying mostly in shares for a deal that looks nice-to-have rather than a decisive fix may reflect that Sawan is saving his cash for more North American deals, exploration in Namibia, or Argentina. Shell investors are still waiting for a full answer to their production question.

Follow Yawen Chen on Bluesky and LinkedIn.

CONTEXT NEWS

Shell said on April 27 it had agreed to buy Canadian energy company ARC ‌Resources in a $16.4 billion deal, which would boost its output by 370,000 barrels of oil equivalent per day.

Shell said in a statement it will pay ARC shareholders C$8.20 in cash and 0.40247 Shell shares for each share, or around 25% cash and 75% shares at a 20% premium to ARC's average share price over the last 30 days.

The deal allows Shell to raise its compound annual production growth target for the decade from 1% to 4% compared to 2025. It plans to keep its liquids production of 1.4 million barrels per day towards 2030 and beyond.

Shell shares were down 2% by 1512 GMT on April 27. ARC Resources shares were up 22% to C$31.5.

ARC Resources has risen in recent years, but recently dipped https://www.reuters.com/graphics/BRV-BRV/gkvlkqngbpb/chart.png

(Editing by Geroge Hay; Production by Streisand Neto)

((For previous columns by the author, Reuters customers can click on CHEN/yawen.chen@thomsonreuters.com))