Activist Investor Seeking Shell Breakup
and a bunch of oil companies testified before Congress too
Hey there, welcome to the November issue about oil and gas. You might think, why the hell is this guy writing about oil, isn't this a newsletter about polymers and plastics? Oil is the foundation that the majority of the chemical industry is built on and fluctuations of what happens in the oil markets eventually move downstream and influence the chemical industry. This can take anywhere from a few weeks to a few months, in the event of a cold snap happening in Texas perhaps a few days. If you want to predict the future of chemicals, read the oil news.
The Polymerist is presented by:
Oil Companies Testify Before Congress
In the last thirty days perhaps one of the biggest stories around oil and gas was that executives of US based oil companies testified before the House of Representatives. The testimony was about the role that these companies have played in climate disinformation and their lobbying against further legislation of the oil and gas industry. Hiroko Tabuchi and Lisa Friedman of the New York Times reported:
Democrats had hoped to recapture the drama of the tobacco hearings of the 1990s, where lawmakers put the C.E.O.s of cigarette companies on the hot seat and each executive told the country that smoking was not addictive.
The significant flaw in comparing tobacco companies to oil and gas companies is that smoking is completely elective, provides very little value to the world, and has been proven to kill people. Oil and gas companies provide a necessary good and service to people while the side effects are climate change (people die too I think). As I write this newsletter early in the morning the gas furnace in my apartment has kicked on and I’ve got warm air because it’s cold in Massachusetts right now. I wish my landlord would invest in a heat pump.
Democrats want to know if the oil and gas companies knew about climate change and actively spread disinformation about it. Democrats say that the oil and gas companies are not complying with their requests while the oil and gas companies counter that they are compliant. Katy Stech Ferek and Christopher M. Matthews of the Wall Street Journal reported:
Exxon Mobil CEO Darren Woods denied that the company had spread disinformation about climate change and said Exxon has responded to the issue as the scientific community’s understanding of it has developed.
“The fact that ExxonMobil has supported certain climate policies, such as a revenue-neutral carbon tax and adherence to the Paris Agreement, while opposing others, is not tantamount to promoting climate disinformation,” Mr. Woods said in his statement.
I suspect that there was some amount of marketing by oil companies on their virtues while downplaying their role in climate change to the Democrats point, but these companies are investing a bit of money in trying to change. I think some are investing into technologies outside of crude oil extraction and refinement more than others. Neste and Shell appear to be leading the way towards something that resembles sustainability while ExxonMobil needs to be dragged by activist investor Engine No 1.
Activist Investors Continue Oil Crusade
Speaking of activist investors, Third Point, a shareholder of Royal Dutch Shell, has called for the company to break up. The idea is that the oil giant is too big and is trying to do too many things. This means that different parts of the business are in opposition to each other which can create friction and inefficiency in the company. If we apply the current M&A activity in the chemicals business then this is a similar philosophy here for oil and gas around “purer plays.” Stanley Reed of the New York Times reported:
Mr. Loeb called Shell “one of the cheapest large-cap stocks in the world.” He also said that by most metrics, Shell was trading at a 35 percent discount to its rivals Exxon Mobil and Chevron, despite what he called “higher quality and more sustainable” business lines.
Mr Loeb is Third Point’s chief executive and his call for a breakup makes sense from a shareholder perspective of wanting more fine tuned control of a portfolio’s end markets. Shell’s Chief executive Mr. van Beurden has argued that revenue and profit from Shell’s legacy businesses will fuel their investment of billions into renewable energy and non-oil based revenue generation. He further believes that continued development of more sources of oil and gas are critical for supplying energy to a growing world while installation of renewable energy can catch-up.
I can see both perspectives here and I’m not a professional investor, but my feeling is that Shell might be best poised to enact the sustainability changes that a Dutch court has ordered them to do as opposed to breaking up the company. I also want Shell to lead the way in a renewable energy transition and be successful so they can tell their American counterparts something to the effect of, “We cut our emissions in half in less than ten years and we are making a lot of money from renewable energy and energy storage systems. We also created enormous value for our shareholders. Why haven’t you done this already?”
A Word From My Sponsor Written By Me
This is the second to last issue that Task Force Talent will be sponsoring for this run. This means you still have plenty of time to reach out, get resume feedback, or see what kinds of jobs Task Force Talent is looking to fill. I often like to talk to recruiters just to get a sense of what the job market is like the way they see it. You get enough recruiters telling you the same thing and perhaps you’ve uncovered a trend in the job market that isn’t being published on The Muse or LinkedIn. Do you have skills that are being waste in your job? Now might be the time for a new one.
Massive Profits and Value for Shareholders For Now
Saudi Aramco, Halliburton, and BP have all posted strong growth in the third quarter due to a multi year high price of oil and demand coming as the world battles back the Delta variant. I’ve noticed gasoline prices in my area are creeping over $4 per gallon and as we head into winter the record high natural gas prices mean that heating will be more expensive than it was last year. I think for oil companies it will be hard to “transition” away from the biggest money maker they have ever known, especially during a high price environment like we have now.
Ron Bousso of Reuters reported on BP’s quarterly results:
"The company can talk about 'Performing while Transforming' all it likes but it needs to prove to shareholders and the markets as a whole that it can transition to renewables in a way that doesn't hammer its margins, and the jury is likely to remain out on that," Michael Hewson, chief market analyst at CMC Markets UK, said in a note.
BP’s trading division did make $500 million on the high prices of natural gas and as the company seeks diversification away from oil perhaps it will be through financialization. What I suspect will happen in the short term is that shareholders might take the money now from these oil companies and look for start-ups or more established companies making headway in renewable energy storage to place their next bet.
The big question we need to ask is how much longer will oil and gas be necessary to bridge the gap to renewable energy, 5 to 10 years? Just as the automobile replaced the horse we will see EVs replace internal combustion engine automobiles. Heat pumps are becoming more viable every year, especially in colder environments, and could be displacing natural gas and oil heating due to their ability to save people money.
An investor being able to fine tune their portfolio means it’s easier to dump the oil dependent stocks when they want and invest the profits into newer, leaner, and more innovative companies that are set-up for huge growth. The desire to break up Shell makes sense when looking at it from this perspective. Investors might not care if the oil companies can transition their business because some of them might not exist.
Innovate or die.
Tony
Like this issue of the newsletter? Check out earlier issues below:
Extracting Oil Isn't Easy, But Someone Has To Do It For Now