Shell Eyes Simpler Structure as Scrutiny Mounts

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Royal Dutch Shell plans to further simplify its corporate structure by transferring its tax residence to the UK and replacing its two classes of shares with one.

Shell says the move will make it more competitive and agile as its works toward achieving net-zero greenhouse gas emissions by 2050.

But of greater immediate importance is the benefits afforded by a simplified share structure. Shell can now accelerate share buybacks at a time when activist investors have put its value proposition under fresh scrutiny.

Jefferies analysts note that Shell can also more efficiently execute other financial operations such as equity raises and demergers with the restructure — tools it may opt to use as it transforms from an oil and gas producer to a diversified energy provider.

The proposal will require the support of 75% of the votes cast at a special shareholder meeting to be held in Rotterdam on Dec. 10.

Rewarding Shareholders

Shell is fighting to convince shareholders that its approach to the energy transition can deliver lasting value and returns.

The company is looking to become a "one-stop shop" energy provider to municipalities, companies and retail consumers, with its offerings shifting from oil products and natural gas to biofuels, hydrogen and renewable electricity over time.

The major aims to lean on its highly integrated global operations, trading prowess and expansive retail presence to pull it off, with management largely agnostic as to whether Shell produces the energy that is ultimately sold.

But not all are convinced that this is the correct path.

US hedge fund Third Point has recently called on Shell to break up its legacy petroleum operations and its renewables and natural gas businesses into separate companies. The former would wind down and accelerate returns to shareholders, while the latter would focus on growth.

Management opposes the plan since it would require a dismantling of its integrated approach. But Monday's proposal shows it is also clearly aware of the need to ensure investors that it can deliver competitive returns just the same.

Shell's current two-class share system — with A shares a primary listing in Amsterdam and B shares a primary listing in London — effectively limits share repurchases to its B shares. Investors who hold A shares also have to pay a 15% withholding tax that the Netherlands levies on dividend payments.

By collapsing its shares into a single class that would continue to be listed in Amsterdam, London and New York, Shell significantly widens the pool of shares it can repurchase, and simplifies the tax structure for would-be investors.

Shell began a $2 billion buyback program in July, and said in September it would return an additional $7 billion in cash to shareholders after completing the sale of its Permian Basin shale assets to ConocoPhillips.

Environmental Scrutiny

Shell's proposal to shift its official registration from the Netherlands to the UK for tax purposes and relocate its CEO and CFO to London also comes as the major is embroiled in a legal battle with the Dutch court over the speed of its plans to reduce emissions.

But analysts do not see the case playing a major role in Shell's relocation plans.

The company recently agreed to accelerate plans to reduce its absolute operational (Scope 1+2) emissions by 50% by 2030, exceeding the court's demands for a 45% reduction. But Shell is appealing the same court's demands that it also reduce its customers' emissions (Scope 3) by 45% this decade.

Jefferies analysts believe that having a clearer separation from the Netherlands could make it harder for the Dutch court to claim jurisdiction over Shell's emissions.

But others note that pressures on Shell — and other major producers — to address their full value chain emissions are universal enough that changing locales would not afford it a meaningful escape.

Keeping Ties

Although Shell will be dropping the "Royal Dutch" element from its official name with the restructuring, the company said it is proud of its historic ties to the Netherlands and will retain a significant presence there.

That includes the Rotterdam area, where the company has legacy refining and petrochemicals interests and where it plans to invest in biofuels, hydrogen and carbon capture assets.

The Financial Times reported Monday that the Dutch government is mulling an eleventh-hour parliamentary bid to scrap the country's 15% withholding tax in an effort to keep Shell in The Hague.

Corporate Strategy , Equity and Debt Markets
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