Last October, a hedge fund disclosed a stake worth $750 million in Shell and urged the supermajor to split its fossil fuel business from its renewable energy business in a move that just a decade ago would have seemed, to put it mildly, eccentric. "Shell has too many competing stakeholders pushing it in too many different directions," the owner of the hedge fund, billionaire Daniel Loeb, wrote to his clients.
While the two companies held preliminary talks on the topic, according to Shell, there has been no news on any splits since last October, perhaps because the owner of Third Point is otherwise occupied with shareholder disgruntlement.
Yet earlier this month, a former industry voice lent itself to the split-Big-Oil idea: former BP chief executive and current chairman of BeyondNetZero, a climate change-focused investment vehicle, part of General Atlantic.
In a recent piece for Time magazine, John Browne acknowledged the commitments many oil companies had made about reducing their carbon footprint but noted that "First, companies need to be bolder in separating low- and zero-carbon activity from their fossil-fuels business. The former is rapidly growing, less capital intensive and valued at a premium by investors, whereas the business of hydrocarbons is capital intensive, unloved by the market and in decline."
That oil is unloved by certain parts of the market is certainly true. However, it is not entirely true that it is universally unloved.
According to Morningstar data recently cited by the Wall Street Journal, for instance, the energy sector outperformed every other industry in terms of fund performance, with asset inflows into energy funds adding a net $11.4 billion last year.
Ratings agencies appear to be optimistic on oil stocks as well, even on U.S. oil producers and refiners who are far behind the European supermajors in terms of climate commitments and action.
So why should Big Oil split at all?
It seems the push aims to make it easier for ESG investors to buy into, say, Shell's renewable energy business without having to also effectively buy into its oil business. But it also seems this is not a good enough reason for Big Oil to separate its still much more lucrative oil and gas business from its rather smaller, rather newer renewable energy business.
BP's Bernard Looney, the man who in no uncertain terms said BP's future is low-carbon and with rather unfortunate bad timing, recently said that world oil demand had peaked in the early months of the pandemic, called rising oil prices a "cash machine". It was these prices—oil and gas prices—that helped BP book a solid increase in profits, which, in turn, allowed it to further boost shareholder returns.
Separating this cash machine from a business that has yet to take off and is being financed with money from that very same cash machine would hardly make sense for any company while the cash machine is still going strong. Or would it?
"If companies take steps to separate these very different types of activity into two corporate entities, investors can allocate their capital more efficiently, and the true value of the low-carbon businesses embedded within large hydrocarbon producers will become clearer," said Lord Browne of Madingley in his Time Magazine piece, pointing to Italy's Eni as an example.
Eni said in November that it planned to list its renewable energy business under the name Plenitude. But Plenitude will not be purely a renewable business, and this is noteworthy. Plenitude also includes Eni's retail oil and gas operations, even though chief executive Claudio Descalzi said the hopes were to have Plenitude deliver 100-percent decarbonized products by 2040.
Speaking to the FT, Descalzi also pointed out at the time that on its own, the business would be able to grow more quickly and would be able to free up resources at the legacy company to transform in line with climate goals.
"This will free up more cash for Plenitude, the new company, to develop renewables by itself and leave us more space, more free cash flow to invest in the transformation of the company," Descalzi explained.
The FT's Helen Thomas called Eni a test case, and it is indeed a test case that will show whether splits are a good idea for Big Oil or not. After all, as both BP and Shell have explained more than once, the oil money, to put it crudely, is essential for the renewable energy business.
This is unlikely to change anytime soon, especially with the current outlook for oil prices. With forecasts for tight supply as spare capacity at OPEC dwindles and public oil drillers maintain their cautious approach to production growth, splitting oil from non-oil operations does not really make sense.
This would likely change when the oil market swings into a surplus but, interestingly, even though the IEA said the market had swung into a surplus in December, the effect of this report on prices was negligible. It seems that for now, it would be best to keep the cash machine as part of the business it is powering.
By Irina Slav for Oilprice.com
