The Royal Dutch Shell share price has been one of the outperformers on the FTSE 100 year to date, which isn’t that surprising when you consider the recent surge in natural gas and crude oil prices so far this year.
When the company reported back in July, the company raised its dividend by almost 40%, as well as buying back $2bn of its own shares.
There is no question the continued improvement in oil and gas prices has helped boost Shell's income numbers year to date, with adjusted net income rising to $5.53bn, in Q2, so this morning’s Q3 numbers are particularly disappointing, coming in at $4.13bn, well below expectations of $5.42bn.
Shell share price slides
Given how much fossil fuel prices have risen this quarter, today’s number are a particularly poor outcome, even if you factor in the disruptions from Hurricane Ida, which cost the business $400m.
The company also cited higher costs elsewhere, as it said that Q4 would see a better performance due to lower maintenance costs, however that hasnt stopped the Shell share price slipping back in early trade.
This underperformance has prompted activist shareholder Dan Loeb’s Third Point Group to call for the break up of the company, after taking a $750m stake in the business, splitting it into the legacy business, and into renewables and marketing unit. His argument appears to be that Shell is trying to serve two masters and that you can’t be all things to all people.
The problem with that argument is that the legacy business needs to fund the transition to renewables, so there inevitably needs to be an element of crossover, although the argument for a split has garnered some support on the margins.
Management needs to focus on renewables
It's not hard to understand shareholder frustration given the underperformance of the business, as well as management’s preoccupation with shareholder payouts, as opposed to taking advantage of the recent rise in energy prices to fund investment in renewables, as well as cutting its emissions.
Quite frankly management need to get their act together and decide on a direction of travel, and not be distracted by what Third Point calls “competing stakeholders pushing it in too many different directions.” Shell needs to stop pandering to external pressure and virtue signalling by setting ambitious targets and focus more on the task at hand.
In September, Shell sold its Permian Basin business to ConocoPhillips for $9.5bn, promising to return $7bn to shareholders, and pay down its debt which fell to $57.5bn. This comes across as a skewed set of priorities; by all means return funds to shareholders, but the focus on shareholder returns, and lack of investment in the transition to renewables points to a lack of seriousness when it comes to transitioning the business.
The transition to renewables is not a light switch that you can simply turn on. It needs a clear plan, with the revenue generated by its LNG and oil business helping it to transition towards the lower margin business of renewable energy.