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After saving investors by pulling off double-digit returns in Q3, while the overall market experienced weakness and volatility, Dan Loeb’s hedge fund Third Point is now in the business of saving the planet too it seems.
Having taken a large stake in Royal Dutch Shell PLC, Loeb is urging the oil giant to separate into multiple companies to retain and attract investors as many flee stocks seen as environmentally unfriendly.
Shell is one of the cheapest large cap stocks in the world, trading at under 4x next year’s EBITDA and ~8x earnings at “strip” prices.
It also trades at a ~35% discount on most metrics to peers ExxonMobil and Chevron despite Shell’s higher quality and more sustainable business mix.
Compared to its peers, Shell generates a much larger percentage of its cash flow and earnings from stable businesses that have a major role to play in the energy transition.
According to the latest letter to investors, Third Point believes Shell should consider creating at least two stand-alone companies: one with legacy businesses such as refining that would provide steady cash flow and another that houses renewables and other units requiring substantial investment.
“For example, a standalone legacy energy business (upstream, refining and chemicals) could slow capex beyond what it has already promised, sell assets, and prioritize return of cash to shareholders (which can be reallocated by the market into low-carbon areas of the economy),” the letter reads.
And a standalone LNG/Renewables/Marketing business could combine “modest cash returns with aggressive investment in renewables and other carbon reduction technologies,” with the business benefiting from a “much lower cost of capital.”
Crucially, Loeb wants people to know this is not just about the money, claiming in the letter that if Shell pursues this type of strategy it would probably lead to an “acceleration of carbon dioxide reduction as well as significantly increased returns for shareholders,” adding that he sees opportunity for “improvement across the board.”
The billionaire hedge fund manager praises Shell’s reduction in refineries, from owning 54 in 2004 to only 5 by year-end 2021, as a “remarkable accomplishment,” and says Shell is positioned to return capital “earlier and more aggressively than peers,” due to its “massive” dividend cut and asset sales.
Many ESG investors employ a strategy of buying companies that already have a clean bill of health.
A lesson from our prior engagements is that it is often most impactful to invest in companies where the opportunity for positive change is the greatest.
While daunting, there is perhaps no bigger ESG opportunity than in “Big Oil”, and specifically, at Royal Dutch Shell.
We are early in our engagement with the company but are confident that Shell’s board and management can formulate a plan to accelerate decarbonization while simultaneously improving returns for its long-suffering shareholders.
Royal Dutch Shell ADRs, traded on the NYSE, spiked on the report…
Finally, amid all the current soaring/record energy costs around the globe, Bloomberg’s Javier Blas sums up the farcical virtue-signaling (and hypocrisy) being seen by activist investors when it comes to fossil fuels…
We better get oil demand peaking, and soon, and then falling even faster, because oil capex is effectively over. Activist investors are taking over Big Oil, and they want their cash, and quickly (and save the planet, that too…) #OOTT
— Javier Blas (@JavierBlas) October 27, 2021
As Blackstone Inc. co-founder Stephen Schwarzman warned this week at a conference in Saudi Arabia: “We’re going to end up with a real shortage of energy,” he said.
“And when you have a shortage it’s just going to cost more and it’s probably going to cost a lot more. And when that happens you’re going to get very unhappy people around the world, in the emerging markets in particular.”
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Full Third Point letter below:
Wed, 10/27/2021 – 14:07