Hedge Fund Launches Bid to Split Shell

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Hedge fund titan Third Point has taken a large stake in Royal Dutch Shell and is pushing to break the oil and gas giant up into multiple public companies to boost its valuation.

Shell's share price performance has been hampered by a strategy and company structure that tries to please too many competing interests with different priorities for growth, shareholder returns and decarbonization, Third Point founder Daniel Loeb argued in a letter to the fund's investors.

"Shell's board and management have responded to this with incrementalism and attempts to 'do it all,'" Loeb said.

"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."

The bid by Third Point is one more illustration of the potential for further massive changes at the largest Western energy companies as they grapple with their place in the energy transition.

Shell has resisted such ideas, arguing that its integrated, marketing-focused model is well-suited to adapt to the changing energy mix.

But earlier this year, little-known investment fund Engine No. 1 unseated three members of Exxon Mobil's board in a push to sharpen its energy transition strategy.

Elsewhere, Italy's Eni has already committed to an initial public offering (IPO) of its renewables and retail gas and power unit, while Spain's Repsol is analyzing a similar approach.

Loeb proposes that Shell should split itself up and create "multiple standalone companies" housing the varied parts of its portfolio that could appeal to investors with different desires.

He suggests that Shell's legacy oil-related businesses could essentially be wound down by scaling back investment, selling assets and returning cash to shareholders, while the natural gas and renewables businesses could offer lower shareholder payouts but higher growth.

"Pursuing a bold strategy like this would likely lead to an acceleration of CO2 reduction as well as significantly increased returns for shareholders, a win for all stakeholders," Loeb wrote.

Shell responded that it "regularly reviews and evaluates the company's strategy with a focus on generating shareholder value."

"Shell's Investor Relations team has had preliminary conversations with Third Point and we will engage with them, as we do with all of our shareholders," the supermajor said in a statement after news of Third Point's proposal became public.

Shell executives have pushed back against suggestions that the company would be more valuable if it were split into its different business units.

"I fully believe this is the right model for the energy transition," Shell CFO Jessica Uhl has said of Shell's integrated structure.

TotalEnergies CEO Patrick Pouyanne has expressed similar sentiments, saying a spinoff of the French major's sizable energy transition businesses is "not on the table."

Strategic Differences

Others, however, have embraced the idea — albeit in a less dramatic form.

Eni announced earlier this month that it would begin the process for an IPO of a minority stake in its Eni R&R unit, which houses its retail power and gas business and its renewable power generation business.

Repsol is entertaining a similar approach for its own renewable power division, alongside the possibility of bringing in a strategic financial partner for the business.

Eni has also sought out different corporate structures for some of its legacy upstream assets.

It combined its Norwegian offshore business with private equity-backed Point Resources to form Var Energi. The two announced on Wednesday that they are considering strategic options for Var, including a potential IPO.

But Shell has approached the transition with a significantly different strategy than Eni or Repsol.

Unlike many of its competitors, Shell has largely steered clear of renewable power generation and instead focused on selling power to customers, regardless of where it is generated, rather than setting lofty targets for its own renewable power capacity.

Existential Questions

The question of what the energy company of the future should look like is often pondered by analysts and investment bankers, but there is little consensus about which of the various models is likely to prove most successful.

European utilities faced similar questions much earlier than the oil sector. Many splintered into companies specializing either in renewable or fossil-fuel power and sold off their upstream oil and gas units.

The pure-play renewables companies that emerged from this process have flourished but the benefits haven't always come back to the parent company.

"Historically, European oil companies and utilities which sell down assets at a premium to fair value do not see sustained share price performance beyond the very short term," the analysts at investment bank HSBC said in a note.

But Loeb's overture, coming on the heels of an investor-driven shakeup of the board at Exxon Mobil, shows that companies themselves may not have as much choice in the matter as they would like.

Oil majors were once seen as impenetrable fortresses where investors rarely dared to challenge board decisions.

The scale of change in the energy transition, ongoing efforts to develop convincing strategic responses, and lagging share values have opened them up to criticism — and made them more vulnerable to interference from activist investors.

Wire service reports estimated the value of Third Point's investment in Shell at between $500 million and $750 million against Shell's total market capitalization of around $190 billion. But Engine No. 1 succeeded with a similarly small holding in Exxon.

Corporate Strategy , Majors, Equity and Debt Markets
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