Shell is under pressure to break up after activist hedge fund Third Point built up a $750million stake.
The push from Third Point, led by Dan Loeb, is the most serious challenge yet to the Shell strategy of embracing the energy transition while continuing to pump oil and gas.
Loeb’s Third Point LLC has taken a $750 million stake, according to a person familiar with the matter, equivalent to about 0.4% of the company. The firm said in a letter Wednesday to investors that Shell would benefit from breaking off its liquefied natural gas, renewables and marketing businesses into a standalone company. That would separate it from Shell’s legacy energy business, which would include the upstream, refining and chemicals operations.
A break-up of the 188-year-old Anglo-Dutch oil major, which has a market capitalization of about $190 billion, would be a truly seismic event for the global energy industry as it grapples with ever-louder demands to curb greenhouse while trying to remain economically viable. Loeb’s move comes less than a year after activist investor Engine No. 1 ran a successful proxy contest to elect new directors to the board of Exxon Mobil Corp., in part over what it says is the company’s lack of action on climate change.
Loeb argues the past two years have been difficult for Shell’s shareholders, with a major dividend cut and a well-publicized order from a Dutch court to change its business model. In fact, he said, it’s been a difficult two decades for shareholders, with annualized returns of just 3%.
“Shell’s board and management have responded to this with incrementalism and attempts to ‘do it all.’ As the saying goes, you can’t be all things to all people,” Loeb said in the letter. “In trying to do so, Shell has ended up with unhappy shareholders who have been starved of returns and an unhappy society that wants to see Shell do more to decarbonize.”
Loeb said he has already started early engagement with the company, and is confident its board and management will formulate a plan to reach its decarbonization goals while improving returns for shareholders.
Shell, which reports third-quarter earnings on Thursday, confirmed its investor relations team has had preliminary talks. “Shell welcomes open dialogue with all shareholders, including Third Point,” it said in a statement. “We will engage with them.”
Shell’s American Depositary Receipts rose as much as 3.9% in New York trading.
Loeb said he believed Shell was one of the cheapest large cap stock in the world. He noted that it trades at a 35% discount on most metrics to its peers, Exxon Mobil Corp. and Chevron Corp., despite having higher quality assets a more sustainable business mix.
‘Incoherent, Conflicting’ Strategies
He argues that’s because it has too many competing stakeholders, pushing it in too many directions, resulting in “an incoherent, conflicting set of strategies attempt to appease multiple interests but satisfying none.”
That’s also why splitting up the business would make sense, Loeb said. The standalone legacy energy business could focus on slowing down its spending, selling assets, and returning cash to shareholders as a standalone entity.
At the same time, he estimates that the LNG, renewables and marketing activities, which he refers to as Shell’s energy transition businesses, are expected to generate over $25 billion in earnings before interest, tax, depreciation and amortization in 2022. On a standalone basis, that might be worth as much as the enterprise value of the entire company, despite only generating about 40% of its business, according to Loeb.
He said the energy transition business could aggressively invest in renewables and other carbon-reduction technologies.
“Pursuing a bold strategy like this would likely lead to an acceleration of C02 reduction as well as significant increased returns for shareholders, a win for all shareholders,” he said in the letter.
Dutch Court
Shell has come under fire from activists, the courts and its own investors over its role in climate change. In May, a Dutch court said that the company would have to slash its carbon emissions 45% by the end of the decade, going far beyond Shell’s own plans.
The oil major has succumbed to pressures to reduce emissions by putting to vote an energy transition strategy that will see see Shell produce more gas, less oil and ramp up investments in renewables. Still, for some investors, that’s not enough. On Tuesday, the Netherlands’ largest pension fund and once-ally of Shell said it would divest its fossil fuel assets.
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