Shell’s capitulation to activist investors will send shivers through Big Oil
February 2, 2014 Leave a comment
Shell’s capitulation to activist investors will send shivers through Big Oil
January 31, 2014 12:58 pmby Nick Butler
The package of announcements from Shell will send a shiver through the oil and gas industry. After years of resisting investor pressure for more immediate gratification, the company which more than any other regards itself as a social institution dedicated to the long term, has blinked. Capex is to be radically reduced. Costs are to be cut with a sharp knife. $15bn of assets are to be sold – enough in themselves to form a medium sized company. And the dividend is to be increased. There is a touch of theatricality in combining a profits warning with a dividend increase but the show satisfied the immediate audience. The shares rose. For the rest of the sector, Shell’s ability to deliver in this way poses a dangerous challenge.
Underperformance is endemic across the industry. Investment always needs to be increased, the rewards are always promised for tomorrow. Among investors are innumerable funds whose need for cash returns is urgent. Since the downturn of 2008 the market has clearly become more short term and less tolerant of those who live on promises of a golden future which is always just over the horizon. Under pressure Shell has been able to make the adjustment, demonstrating that it can quickly cut enough to deliver a material and sustainable dividend increase even when oil and gas prices are flat to falling. That is a real measure of strength, as is BP’s ability to absorb a loss of $50bn to pay the bill for Macondo. Very few companies in the world have that capacity.
Those who do not must now consider what investor activism could mean for them. The immediate targets are the North American independents – starting with Hess and Anadarko. But it won’t stop there. Most oil and gas companies including the majors could return more to shareholders if pressed and only those protected by strong state shareholdings such as Total have the capacity to resist. Given the scale of the sector and the extent to which market values have slipped, there is a lot of money at stake.
The implications of all this are widespread. There are now some $35bn worth of assets on the market including $25bn from Shell and BP alone. Many analysts think Shell will sell even more as Mr van Beurden, the new CEO, takes a hard look at his inheritance. Who exactly is going to buy all these assets? That question is particularly pertinent for politically sensitive assets including onshore fields in Nigeria, which were singled out as unwanted by Mr van Beurden. If these activities are a step too far for Shell, who on earth will take them on? Equally who will want to invest in the developed-world refining sector when oil demand is falling year by year in the US, Europe and Japan?
Many smaller companies have few assets to sell. They will find themselves pressed to improve returns not just by cutting back on capex but also by reducing the lavish rewards of senior executives. Activist shareholders do not appreciate the private jet culture. In some instances there is clearly a case for consolidation, and we can expect a new round of M&A activity driven by the desire to reduce costs.
Then there is the Arctic. Environmentalists are celebrating Shell’s decision to stop drilling. This raises questions over what was said to be, in volume terms, the company’s best prospect anywhere in the world. Other western companies with Arctic ambitions will now be wondering whether the campaigners who climbed the shard in London to focus attention on Shell will now turn on them. That is certainly possible, not least because it is probably the only way of influencing the behaviour of the Russian companies whose activities represent the greatest threat to the Arctic environment.
Shell has acted decisively and there is a strong sense that there is more to come. Shell is in the very fortunate position of being able to respond to shareholder pressure sensibly and without destroying its own future. Mr van Beurden is the new hero of the market. He may not be such a hero in the eyes of his counterparts across the industry.