Dan Loeb’s Plan for Shell Requires a Delicate Touch

Liam Denning

28 Oct 2021, 02:08 PM IST

(Bloomberg Opinion) -- When it comes to energy, Dan Loeb believes in transition by incision. On Wednesday, his hedge fund, Third Point LLC, called for Royal Dutch Shell Plc to break itself up into a legacy oil business and a new gas, renewables and marketing business. Here are a few initial thoughts:

First, this is all about the multiples. Last year, I wrote that Europe’s oil majors were building internal energy-transition businesses that, buried inside old corporate structures, were being valued like oil companies — that is, not highly. Shell, which has moved further than most on realigning its business, trades at just 4 times forward cash flow. Meanwhile, Orsted AS, the Danish oil-and-gas company turned wind wunderkind, trades at 18 times. The biggest conundrum facing oil majors with transition strategies is persuading non-oil investors to value these old behemoths as green pioneers. Separating the two businesses is activism 101.
Second, the depth of the cut matters. I would argue a partial spinoff of transition businesses makes more sense at this stage than a full split. Oil companies did this before, similarly chasing higher multiples for buried assets when the master limited partnership craze made pipelines hot property. Done right, a partial spinoff could raise money for developing capital-hungry transition businesses and establish a new set of investors (presumably at a higher multiple). The legacy business, meanwhile, could retain control (and a new wedge of more transparent value) without signaling to the world (including employees) that the old oil assets were effectively being sloughed off entirely. In all likelihood, Loeb might ask for a full divorce but settle for amicable separation.
Third, Loeb displays a seasoned activist’s sense of timing. Exxon Mobil Corp.’s humbling at the hands of Engine No. 1 LLC earlier this year established it as open season on even the biggest game. Shell, meanwhile, has the lowest valuation among the majors despite real tailwinds like the cash from its recent sale of Permian assets to ConocoPhillips and salad days for its liquefied natural gas business. It has suffered several blows in one of its homes, the Netherlands, the latest being news that Dutch pension giant ABP is joining the divestment movement.

Oh, and did I mention Shell is scheduled to report earnings Thursday? Wonder what they’ll talk about on the call.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.