Many experts and talking heads have been discussing how a resurgence in mergers & acquisitions (M&A) activity could be on the rise this year. Unfortunately, it appears this isn’t going to be the case for oil and gas giant Shell (NYSE:SHEL).
Bloomberg reported today that Shell will be cutting 20% of its team responsible for making deals. These Shell layoffs continue a pattern of other headcount reductions at major firms, but it’s one of the first headlines I’ve seen in a while aimed at the M&A space (outside of the banking world).
As an energy major, Shell generates significant revenue from its existing asset portfolio. However, given its size, the only way for the company to reasonably grow over any extended period of time is to add new production. Thus, the company’s M&A team should play a core role in the company’s long-term growth plans, with these cuts potentially hindering the company’s progress on this front.
That said, SHEL stock is up over 1.5% on this news today, suggesting market participants are brushing off any negative side effects of such moves. As we’ve seen with other layoffs, the market is generally taking the view that for massive companies with massive overheads, cutting costs is a good thing.
Let’s dive more into these layoffs and what it may mean for shareholders.
Shell Layoffs Spur SHEL Stock Higher
Oil prices remain elevated, with WTI and Brent crude both hovering around $80 per barrel. In this environment, it appears companies that take a more cost-centric approach to their core business models are getting rewarded by the market.
One might think that these higher energy prices should spur increased production plans. Growth, either via expansion of production output from existing properties or via M&A, should be the goal right now. However, given the boom and bust cycles of the past, investors may be increasingly wary of such approaches, particularly as volatility picks up in the market.
These layoffs, which will reportedly affect several hundred people in Shell’s dealmaking unit, are a relatively small move for a company with tens of thousands of employees. But it could be taken as a symbolic gesture, with the company content with its current portfolio and outlook for M&A growth. If that’s the case, that means less capital will be required to fund these deals and more theoretical cash flow. That’s the other side of the argument (with those taking the bearish stance on this move being that it may affect Shell’s growth profile moving forward).
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
