“Translation—more spending on fossil fuels, less solar and wind.”
By Doug Sheridan
Doug Sheridan
“Translation—more spending on fossil fuels, less solar and wind.”
Javier Blas writes in Bloomberg, the trend has been months in the making, but it reached a high point this week when Shell announced what amounts to a pivot back into hydrocarbons and a promise to deliver higher returns to shareholders.
Gone are the days when Shell aimed to reduce its oil production every year, and lavishly invest in loss-making electricity businesses. Now, Wael Sawan, the company’s new-ish CEO, has promised that it “will invest in the models that work—those with the highest returns that play to our strengths.”
Translation—more spending on fossil fuels, less solar and wind.
That’s music to shareholders and a public rebuttal of the strategy of his predecessor, Ben van Beurden. After all, if Shell will now only invest in what works, the corollary is that previously it was investing in businesses that didn’t. Sawan has now put some of those operations on sale and canceled many others.
Shell faces an uphill battle to convince shareholders it’s serious. The dividend—increased 15% this quarter—is still well below where it was when Van Beurden slashed it in April 2020. At the time, it was the first cut for Shell since World War II. Another round of share buybacks will also help, as will the promise to reduce capex.
Shell said the combination of a focus on higher-yielding investments and “stronger capital and cost discipline” would allow it to return to shareholders 30% to 40% of its cash flow from operations, up from 20% to 30% previously. The increase would help Shell close a valuation gap with its US rivals. Trading at less than three times enterprise value to underlying earnings, Shell is significantly cheaper than ExxonMobil and Chevron, which trade at around five times.
But investors can be forgiven their skepticism. Too many zigs and zags in the last five years—by not just Shell but bp and TotalEnergies—have left shareholders unsure of what comes next. The reaction to the announcement was lackluster. Shell shares barely budged.
Is the latest swing in the European Big Oil industry’s strategy truly the last? Unlikely. But for now, at least, in large part because European govts have woken up to the dangers of reducing investment in fossil fuels in the wake of Russia’s isolation, the ESG trend has lost momentum.
Our Take 1: We're watching European oil majors, almost as if moving in slow motion, walk back the hallucinatory commitments they made during the bad-acid days of the Great Reset. Frame by frame were seeing chastened companies and their leaders admit what they should have stood firm on from the very beginning—that solutions to climate change and the energy transition challenge are going to require much better low-carbon technology than we've got right now... and that oil and gas will, for many reasons, remain vital fuels for the global economy for decades to come.
Our Take 2: Once again, better late than never.