Shares in oil major and FTSE heavyweight Royal Dutch Shell (RDSB) slumped 3.6% to £17.04 despite the group reporting a big jump in third quarter earnings thanks to higher oil and gas prices, as results missed investors’ expectations.
Attention also fell on its historically low returns and valuation after US activist investor Dan Loeb took a stake in the firm and called for it to be broken up to increase shareholder value.
PROFIT SHORTFALL
For the three months to September, adjusted earnings - which are profits attributable to shareholders plus certain costs and excluding others - soared to $4.13 billion from $955 million last year.
However, this was still some way short of consensus forecasts of a $5.4 billion profit. Part of the deficit was due to the impact of Hurricane Ida, which knocked $400 million off earnings, and part due to lower refinery utilisation.
On an underlying basis the firm posted a loss of $447 million compared with profits of $489 million last year and $3.4 billion the previous quarter, after it took a $5.2 billion charge for its derivatives book and an unspecified $300 million impairment which was partly offset by gains on asset sales.
Cash flow generation was strong, however, hitting $16 billion in the quarter, which allowed the company to reduce its debt pile from $65.7 billion in June to $57.5 billion in September, even after allowing for cash outflows for the ongoing share buyback.
BEHIND THE SCENES
Meanwhile, investors’ attention was diverted by two other issues: the firm’s environmental credentials, and the arrival of activist investor Dan Loeb’s Third Point (TPOU) on the shareholder register accompanied by a demand to break up the business.
On the ESG front and ahead of the COP 26 climate summit, the company announced it would reduce its emissions by 50% by the end of this decade compared to 2016 levels, a step it called an ‘important milestone’ on its path to becoming net-zero by 2050.
It also brings the firm into line with the Dutch court’s ruling on its scope 1 and scope 2 emissions for 2030, which it has appealed but which it now says it is committed to achieving anyway.
In another development, Third Point LLC revealed in its shareholder letter this week it had taken a position in Royal Dutch Shell during the last six months.
While praising management for having streamlined the company, the fund manager called for the business to be broken up into multiple standalone units in order to reduce its cost of capital and improve shareholder returns.
EXPERT VIEW
Commenting on the results, AJ Bell investment director Russ Mould said: ‘Normally one shouldn’t get too hung up over three months’ trading, but this was meant to be Shell’s big quarter, given the surge in oil and gas prices in the past few months. Sadly, it has missed earnings forecasts and left investors feeling frustrated.’
However, the arrival of an activist investor calling for a break-up of the company was arguably ‘the bigger story’, said Mould. ‘Third Point argues Shell has lost focus as it can’t run a business with conflicting strategies of trying to go green via renewable energy and retaining oil and gas production.’
While the company can be expected to fight back, splitting off the oil and gas assets has long been seen as a logical next step for the business, although no-one has actively called for it until now.
‘There is an argument to say the firm’s renewables operations are not yet large scale and the cash flow from the oil and gas operations is required to fund investment into areas like wind power, observed Mould.
