Royal Dutch Shell (LSE:RDSB) has been in the news lately. The activist hedge fund Third Point has called for Shell to be split up. Third point is an SEC-registered investment fund that focuses on ethics and value-based investing. It claims that Shell is not taking sufficient steps towards its climate goals and that this is hurting investors.
Shell has refuted these claims and abrdrn, another major investor, believes a split would damage the company. As a rule, I don’t invest in oil companies. But the possibility of a green-only subsidiary with the capital of an oil giant has me interested.
Key statistics
Royal Dutch Shell is an Anglo-Dutch petrochemical company. It holds the rights to oil and gas fields across the world and has integrated refinement and distribution arms. It has also been making investments in researching hydrogen based fuels.
Today, Shell has 5.7bn shares outstanding — the total number of shares available — and is trading for 1,679p.
Third Point has currently has a $750 stake in Shell, which is quite a small holding compared to other investors. Despite this, the fund’s leader, David Loeb, made headlines on 27 October by suggesting that the company should be split up.
Why split up?
Loeb has called for the breakup because he believes that too many competing interests among stakeholders are preventing the Shell from taking decisive action on climate change.
Loeb claims that Shell is trying to appease shareholders who want maximum profits (by maintaining petrochemical extraction) as well as those who want to go green. The result of this is an ‘incoherent, conflicting’ strategy that appeals to no one and achieves nothing. Shell’s much touted blue hydrogen initiative has shown few results and relies heavily on non-existent carbon capture technology. Despite an announced share buyback worth $2bn, Shell has cut its dividend from 47 cents to 16 cents and the share price hasn’t fully recovered from the 2020 crash (when it traded for 2,270p).
Loeb argues that breaking Shell into multiple subsidiaries will allow for each division to focus on its core goals. It seems he’s not the only one losing confidence in Shell. Dutch pension fund ABP has announced plans to divest all of its holdings in Shell, worth $15bn, claiming there is ‘insufficient opportunity’ to achieve ‘necessary, significant acceleration of the energy transition’.
Could this push up the share price?
There is no guarantee that Shell will split up, but if it does then how that split is implemented would have a major effect on its share price.
Abrdrn argues that splitting Shell up would negatively affect the company’s highly integrated supply chain. A fall in revenue would hurt investor confidence and bring the share price down.
But, a company with even a fraction of Shell’s resources, focused on green energy, would be in a position to race ahead of the competition. A split up represents the kind of bold and decisive action needed for companies to survive the green transition.
For now, a split up still seems unlikely, however, I will keep an eye on the situation. If Loeb and ABP are able to leverage enough pressure to successfully implement this split, I would be interested in adding the renewable subsidiary to my portfolio.
