2023-03-09 16:36:03 ET
Summary
- Energy giant Shell plc is moving its focus away from the unfavorable business environment in Europe.
- A Shell transition from the U.K. to the U.S. was being discussed, and I think it makes sense.
- Spending on renewables will likely be halted, while the core Shell plc business remains at center stage.
- If you saw Atlas, the giant who holds the world on his shoulders, if you saw that he stood, blood running down his chest, his knees buckling, his arms trembling but still trying to hold the world aloft with the last of his strength, and the greater his effort the heavier the world bore down upon his shoulders - What would you tell him?"
- I…don't know. What…could he do? What would you tell him?"
- To shrug.
- Ayn Rand , Atlas Shrugged
This notorious quote from Ayn Rand's novel Atlas Shrugged seems to be a good illustration of what has been happening with the oil and gas industry in the 21st century. While oil and gas are at the core of pretty much every part of the economy one could think of, either directly or indirectly, the industry has been vilified. The pressure has been the strongest in the EU and the UK, making Shell plc ( SHEL ) one of the favorite targets of "green" activists. However, the recent signals from the company indicate that it has had enough and is about to shrug, leaving behind the unfavorable business environment in Europe.
Target of climate activism
Shell is one of the favorite targets of climate activists. When the company was domiciled in the Netherlands, its headquarters were often blockaded by individuals, who were waving posters, chanting, and demanding basically the company to cease to exist. These events were then picked up by the media and spread around, despite the protestors often being a few dozen people. As a result, a picture was being painted before the public that Shell is an evil company that is killing the Earth. The company was even taken to court in Hague, where the judges ordered it to reduce emissions by 45% by 2030. The hostile environment in the Netherlands - one of the main pushers of the green agenda in the EU, has eventually pushed Shell to move its headquarters to the UK.
While the tax regime in the UK is more favorable to that in the Netherlands, the move didn't save the company from the green mob. So the newly established headquarters in London is also being "besieged" by protestors when there's a shareholder meeting.
Renewables focus
To vindicate itself and hit the emission reduction targets, Shell has begun investing in renewables. However, by the financial results of the renewables division, it looks that it's just a cash-burning machine. Despite revenues of over US$53B and soaring electricity prices in most developed countries, Adjusted EBITDA came at below US$2.5B, while free cash flow was deep in the red. The EBITDA margin of the renewables division has consistently been in the low single digits. I don't expect serious profitability to emerge, as solar and wind are very volatile sources of electricity and at peak supply hours, prices may even turn negative , hurting the results of the energy producer.
Shell's renewables division highlights (Shell; compiled by the author)
However, the good thing is that Shell signaled a pause of CAPEX increase for renewables. I deem this as a step in the right direction, as clearly this segment is destroying value. The other British oil major - BP ( BP ) - has already signaled a scaleback of its renewable strategy, which had a positive effect on the share price.
Hostile business environment in Europe
While the move from Hague to London was indeed a step in the right direction, the UK hasn't really taken advantages that Brexit offered regarding not complying with the EU's green agenda. Instead, fracking remains banned , and the government reached deeper into energy firms' pockets through windfall taxes .
In the latest earnings call , the CEO of Shell was very clear regarding the business environment in Europe, regarding the Shell Energy Retail segment:
For Shell Energy Retail, what we have found is despite a few years of trying to make that work as part of an integrated value chain, the market conditions are just structurally not there for us to be able to create the returns we expect. We have seen significant interventions from the government, including price caps, including windfall taxes. We have seen nationalization in that sector. And so it is not a structurally advantaged sector for us to play in here in the U.K.
A move to the U.S.?
Recently, an information about moving the headquarters to the U.S. was released . This seems very logical, as the U.S. doesn't have windfall taxes on oil and gas and offers much more energy-friendly business environment than the UK of the EU. This is evident from the considerably higher multiples that U.S. energy giants - Exxon Mobil ( XOM ) and Chevron ( CVX ) - are trading at.
While allegedly the move to the U.S. is not currently on the table, I think that such a move will send a positive signal to Shell's shareholders. This would be a signal that Shell has had enough being bullied by the greens in Europe and is ready to proudly embrace its core oil and gas business without paying for indulgence by destroying cash flows in renewables.
Conclusion
Shell plc appears to be approaching the tipping point of effectively "shrugging" against the green pressure in Europe as it pauses growth in renewables CAPEX. Moving to the U.S. would be a serious blow for Europe and a victory for Shell plc shareholders, as the company may start closing its valuation gap with U.S. oil and gas majors.
For further details see:
Shell: The Energy Giant May Be About To Shrug