Third Point, the US activist hedge fund, has recently proposed a significant change to the corporate structure of Shell, suggesting a demerger into a legacy energy business and a low-carbon business including LNG, renewables, marketing. It also applies a de-carbonisation angle to its proposal.

This analysis is part of Carbon Tracker’s new research workstream, Corporate Research, focusing on the evaluation of oil and power & utility companies.

This note argues that the existing proposal is unlikely to enhance shareholder value in the long term, to lower the cost of capital or to stimulate more investments in decarbonisation. A spin-off of the renewables business, once more developed, deserves consideration.

Key findings:

  • A standalone legacy energy business could encounter a serious challenge to its future market valuation due to oil price risk, stranded asset risk, financing risk, regulatory risk, particularly in the event of a disorderly transition. This might erode potential short-term value crystallisation over time.
  • The proposal is unlikely to improve Shell’s transition strategy. This is because even if there was greater investment by the new renewables company, we question the place of LNG in the new entity. Meanwhile, the rump business might become less inclined to decarbonise. Introduction of Scope 3 absolute targets for 2030 and end to new hydrocarbons project sanctioning would instead be an effective strategy.
  • The Third Point proposal could be seen as an illustration of the polarisation in the asset management industry between: those who support investee companies in their energy transition effort, others becoming “impatient” at the costs involved with this, yet others looking to avoid any exposure to fossil fuel and, lastly, an opportunistic constituency driven by short-term goals.
  • Such polarisation, combined with pressures from governments and public opinion, may give rise to M&A and spin-offs in the energy sector, and, importantly, to opportunities for investors to shape the energy transition.