BP Backed Renewable Energy Firm Becomes One Of Latest Suppliers To Collapse

There are investors that will continue to want the cash flow production of a mature legacy company, and there will be equity growth investors who focus more on the decades of growth to come in a historic transition rather than the rate of return right now from renewables.

But the picture isn't clear in this case, especially if the idea is to include liquified natural gas with renewables in one new company because it is seen as a "transitional fuel." For many climate-motivated shareholders that is a non-starter as a strategic combination. And for investors in the legacy company, right now the timing is favorable with oil prices at a level they had not seen since 2014, and with increasing shareholder return programs and divestitures likely. But if oil prices collapse again, those legacy company investors may find themselves in the worse situation than if they had stayed part of the whole.

Carulli said the biggest risk of all, though, is breaking up an engineering company which has been around for a long time as part of a century-old industry, with hundreds of PhDs. who create innovation in technology that could be used across the value chain. "If you separate completely, then that well of human knowledge can collapse," he said.

Yet similar deals to the recent Shell Permian deal are likely to happen again in the near-term after the beating energy shareholders had to take in recent years, compounded by the pandemic, and appeasing shareholders is only made more difficult when some other shareholders will only be appeased by real progress on energy transition.

Kirsten Spalding, head of the Ceres Investor Network, said it is a hard question to answer as to whether Shell has the right structure and the right people in place in management. But the problem with Shell's $9 billion Permian sale to ConocoPhillips, from her point of view, wasn't about how the proceeds were spent but that it accomplished nothing for climate change when the same production merely changes hands. A planned downsizing of fossil fuel assets is what will reduce risk of climate change, and that's a hard case to make to an oil company — that it is their job to not only maximize value for shareholders, but to do so in a way that does not allow them to sell any existing fossil fuel assets to other companies that may pursue exploration and production.

"I think there is diversity among investors, but at least investors I am working with have one voice about systemic risk and the need to get on a transition plan," Spalding said. "The most important thing is investing in renewables and making the transition and becoming a diversified energy company and not a fossil fuels company. What happens on that clean energy side, if we see them ramp up and get good at it and start pouring money into it and doing a better job of really running a renewable energy business, then we would be enthusiastic." 

Many of those investors see only two choices: an oil and gas company either diversifies and does it fast so they become an energy company, or they go out of business in an orderly way. "So far, nobody has taken us up on that option," Spalding said. 

If a company says they will transition by being a supplier of clean energy, they need to show it in the capital they invest in new technologies.

"You have a massive shift and it requires all the force you have," Dalman said. "But if you say 'I don't think we can become a renewables company and just need to sell and close up shop,' then it's fine. There's nothing wrong with an oil and gas company selling assets and returning cash to shareholders over time, basically taking a harvest strategy approach to transition," Dalman said.

"Shell has too many competing stakeholders pushing it in too many different directions, resulting in an incoherent, conflicting set of strategies attempting to appease multiple interests but satisfying none," Loeb wrote in his Q3 letter to investors. "Some shareholders want Shell to invest aggressively in renewable energy. Other shareholders want it to prioritize return of capital and enjoy the exposure to legacy oil and gas."

The activist investor broke down the existential question for Big Oil in very simple terms: "As the saying goes, you can't be all things to all people."

Updated for comments made by Shell CEO and CFO in a call with the media on Thursday.

Source : https://www.cnbc.com/2021/10/28/shell-vs-activist-dan-loeb-is-bigger-for-big-oil-than-exxon-board-war.html

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