Shell walks ‘tightrope’ of demands amid climate, investor pressures
LONDON — From now on, just call it Shell.
Royal Dutch Shell on Friday received approval from shareholders to simplify its archaic corporate structure, which grew out of the merger more than a century ago of a British firm that once traded in exotic seashells and an oil company in the Netherlands.
The changes will mean a single headquarters in London and one class of shares, instead of two, which Shell says will create faster payouts to shareholders and boost its shift to renewable energy amid criticism it has been slow to cut carbon emissions.
It comes as management resists pressure from some investors to break up the company into one business focusing on renewable energy and another for legacy fossil fuels.
The tensions illustrate the challenges oil companies face as they pivot from a business model that has generated huge profits and reliable dividend payments toward a more uncertain future tied to wind, solar and biofuels. With returns from the new ventures unknown, investors are demanding quick returns from existing assets, said David Elmes, an energy expert at the U.K.’S Warwick Business School.
“They’re walking a very difficult tightrope of keeping shareholders happy with the level of dividend and buybacks today versus getting permission from shareholders to switch investment from fossil fuels to low-carbon energy,” Elmes said. “And it seems to be at the moment, that they’re still having to pay an awful lot to shareholders today to get their support for the transition.”
Until now, Shell has had two separate classes of shares, one for its Dutch arm and one for its U.K. arm, which together comprised Royal Dutch Shell Plc, one of the world’s biggest oil companies.
Shell says its new corporate structure will allow it to accelerate share buybacks. The company has already promised to return $7 billion to shareholders as it completed the sale of assets in Texas and New Mexico to Conocophillips this year.
At least one investor is calling for Shell to go further and split into two companies. Third Point LLC, a New York hedge fund, says it would allow both to run more efficiently, returning more money to shareholders and accelerating progress on climate change.
Shell’s stock price has risen 16 percent in the past 12 months, lagging behind the 31 percent gain in Chevron shares and the 46 percent jump for Exxon Mobil.
“You can’t be all things to all people,” Third Point CEO Daniel Loeb said in a letter to investors. “In trying to do so, Shell has ended up with unhappy shareholders who have been starved of returns and an unhappy society that wants to see Shell do more to decarbonize.“
Shell has said it has had preliminary conversations with Third Point and would continue to do so but wants its fossil fuel businesses to fund the transition.
Other European energy companies have opted to spin off their renewable businesses. In October, Rome-based Eni said it was planning an initial public offering of that business. Spain’s Repsol is reportedly considering a similar move for its low-carbon assets.
The pressure for oil companies to shift away from fossil fuels has increased rapidly since the 2015 Paris climate agreement set a goal of limiting global temperature increases to 1.5 degrees Celsius over pre-industrial levels.
Shell Chief Executive Ben van Beurden has made it clear that he wants the company to remain competitive in a world that gets more of its energy from renewable sources. The company last year set a target for achieving net-zero carbon emissions from both its operations and the products it sells by 2050.
To achieve this goal, Shell says it plans to expand its electricity business, invest in renewable energy and build more charging stations for electric vehicles. It’s also investing in carbon capture and storage and “nature-based solutions” such as restoring forests and wetlands to offset carbon emissions.
“The board believes that the simplification will strengthen Shell’s competitiveness and accelerate both shareholder distributions and delivery of its strategy to become a net-zero emissions energy business by 2050, in step with society,” Chairman Andrew Mackenzie said in a statement.
Shell’s net-zero pledge has done little to placate critics so far.
In May, the Hague District Court ordered Shell to cut carbon emissions 45 percent by 2030, saying the company’s net-zero target “is not concrete, has many caveats and is based on monitoring social developments rather than the company’s own responsibility for achieving a CO2 reduction.”
Shell said it was appealing. The new shareholder structure will have no impact on the case, the company said.
Meanwhile, Follow This, an investor group that lobbies oil companies to move faster on climate change, supports Shell’s new structure and keeping it a single entity because it would allow management to focus on cutting carbon emissions, founder Mark van Baal said.
Remaining one company means Shell could use the cash flow from declining fossil fuel sales to invest in renewables, said van Baal, whose group includes 8,000 investors and holds less than 1 percent of Shell’s stock. Breaking up the company would benefit shortterm investors at the expense of cutting emissions, he said.
Shell already is moving too cautiously, with one report suggesting its emissions may actually increase 4 percent by 2030, van Baal said. Long-term investors want change, fearing that floods, fires and other damage exacerbated by climate change are hurting the profits of other companies in their portfolios.
“Institutional investors are really losing their patience,” van Baal said. “The whole world’s economy is at risk because of climate change.”