Trust us to ride two horses at once, say the big western energy companies. We will drill enough oil and natural gas to keep the lights on while shovelling the profits into renewables and electric vehicle charging stations to save the planet at the same time.
Shell, TotalEnergies and BP have all been touting more or less aggressive versions of this strategy for a while. Similar lines have also started to appear at ExxonMobil and Chevron amid pressure from climate activists.
Now Third Point is calling them out. Last week, the activist hedge fund run by Dan Loeb took aim at Shell, arguing that it should break itself up into a legacy oil and chemicals business and a green arm focused firmly on the future.
Legacy Shell would drill the oil it already has while handing most of its free cash back to investors. Future Shell wouldn’t be entirely green: it would use the existing natural gasfields to fund investment in renewables and its service stations.
“You can’t be all things to all people,” is how Third Point puts it. It argues that future Shell would attract growth-oriented investors who value environmental, social and governance factors, while legacy Shell would be optimised for those who value steady streams of cash. The climate would gain because total new investment in fossil fuel would fall.
It is easy to see the attraction of Third Point’s argument. Lumbering oil companies are not ideal hotbeds of green innovation and they have been linked to decades of climate misinformation. They are also clearly more comfortable with drilling than renewables: Shell’s 2021 capital expenditure strategy called for putting $2bn-$3bn into renewables, and $12bn in oil and gas.
Royal Bank of Canada analysts estimate that Shell’s parts could be worth $250bn, well above its current market capitalisation of $178bn. And five months after Anglo American tried a similar trick by spinning out its South African thermal coal assets, shares in the new company have doubled.
No wonder opinions are split. Just last week, ABP, the huge Dutch pension fund, said it was dumping €15bn in fossil fuel holdings including Shell, because it no longer sees the point of working with such companies on decarbonisation. But Blackstone’s Steve Schwarzman warned that failure to invest in oil and gas would lead to social unrest.
Shell counters that there are significant synergies among its various businesses and that keeping them together allows it to help its 30m daily retail customers and 1m corporate customers decarbonise. “These are complete, new value chains that need to be created,” Jessica Uhl, Shell’s chief financial officer, said last week. “We can leverage the assets . . . and the people that we have, and the understanding of the energy system.”
Many investors seem to be coming around to this point of view. Enthusiasm for funds that exclude fossil fuel companies and others that do poorly on ESG criteria appears to have peaked. Assets, which topped $19tn in 2018, dropped back to $15tn last year, Bernstein analysts calculated. Instead, money is flooding into funds that engage with companies or integrate ESG criteria into their financial analysis: combined assets under management hit $35.7tn last year.
More than any other oil chief, BP’s Bernard Looney is trying to catch this wave. He has boldly promised the company would cut oil and production by 40 per cent by 2030 while boosting renewable generation 20-fold.
Yet BP has devoted just 16 per cent of its $9.2bn in 2021 capital expenditure to low carbon, compared to 39 per cent for oil and 24 per cent for gas. Gas arguably makes sense as a transition fuel to help wean the world off even dirtier coal, but the company is still devoting more than half of its long-term investment to fossil fuels.
Adding to the disconnect, BP said on Tuesday that it plans to use the extra profits it has gained from rising energy prices to buy back $1.25bn more of its shares. That’s on top of boosting the company’s dividend and repurchasing $1.4bn in shares last quarter.
Before excoriating Looney for failing to live up to his green rhetoric, it is worth remembering why he feels the need to keep investors sweet. Shortly after he unveiled his transition plans last year, the share price fell to a 25-year low, and it continues to lag behind the other oil majors.
He remains convinced that the plan is the right one, and returning cash to investors gives them a reason to stick around while he shows that BP can execute it. The company calls this “performing while transforming. Our job is to do less talking and more delivering,” Looney says. “We’ve just got to keep at it.”
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