Is splitting up a good idea? ‘Choice between falling over and small in sustainability’

Investors at Shell do not know where they stand, according to American activist investor Daniel S. Loeb. By making it two companies, you can offer investors clarity about the strategy, he says in a letter.

Splitting up Shell is a great idea, thinks Rotmans, professor of transition science at Erasmus University Rotterdam. “The German energy company Eon has done just that: the activities in the field of fossil energy and renewable energy were placed in separate companies.”

Green or fossil energy

“Fossil has no future, you can see that in the share price,” says Rotmans. The share price of Eon, which includes the fossil activities, has increased by 38 percent since the split and that of Uniper (with the sustainable energy) by no less than 230 percent. “Green energy does have a future, in the beginning it is a lot smaller, but it grows quickly.”

“The past ten years proved to be risky for investors in fossil investments. Last year the oil price was still negative and you also see giga fluctuations in the gas price, which investors do not like,” says Rotmans.

Two currents

“If Shell doesn’t split, then it has no future,” he says. “There are two currents within Shell and if the group does not split up, the two will get in each other’s way after some time.”

In the event of a split, the part for sustainable energy must be given a dowry, in order to be able to make the necessary investments in the beginning. Otherwise, the new company is not viable, explains Rotmans.

Competition performs better

The Shell share has not done well on the stock exchange this century, as shown in the graph below. The share price fell by no less than 31 percent, while the American peer ExxonMobil is 57 percent higher and Chevron even 160 percent. The AEX rose on balance by 26 percent in that period.

“Shell makes far too little profit, especially at an oil price above 80 dollars. Even capital is destroyed,” says Jos Versteeg, analyst at InsingerGilissen.

Short or long term

But not everyone is so enthusiastic about the split from Shell. “It is only a good idea if you, like activist investors, look at the short term and think that the company is worth more in two than it is now,” says Mark van Baal of action group Follow This.

“But if you look at the longer term, I don’t think splitting will help Shell and it won’t help climate change either.” It is actually better if the profits made from fossil fuels are used to invest in sustainable energy, says Van Baal.

Shell has global market power to accelerate the energy transition. In addition to supplying oil and gas, the company can also supply electricity on a much larger scale to charge electric cars, he says. In addition, Shell can also exert influence on politics to accelerate the energy transition, thinks Van Baal.

Arrows soon on ‘Shell dirty’

RTL Z trade fair commentator Jacob Schoenmaker also doesn’t think it’s a good idea if you get a ‘Shell clean’ and a ‘Shell dirty’. “I don’t see how a split is a solution to the discussion to become cleaner. And shareholders, such as large pension funds, will still target the company with fossil energy,” he says.

A split might be interesting for investors, Schoenmaker thinks. “The ABP is a bit reluctant to leave Shell now, but they would have an alternative if there was a ‘Shell clean’.” He does wonder how viable such a company will be. After all, the fossil parts of Shell are still financing the sustainable alternatives.

From giant to small player

It doesn’t really matter to Shell whether it comes to a split, thinks Marja Minnesma of climate organization Urgenda. She is gloomy about the future of the company.

Fossil fuels have no future and Shell can never grow as big with oil and gas with renewable energy, she says. “Shell therefore only has the choice between falling over or becoming a small player in green energy.”

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