Ahead of the company’s third-quarter earnings release, Daniel Loeb (Trades, Portfolio)’s Third Point announced on Wednesday that it established a position in Royal Dutch Shell (RDS.A, Financial) and called for a break up of the company into several standalone businesses.
The Netherlands-based oil giant said on Thursday that for the quarter ending Sept. 30, it reported a net loss of $447 million, compared to net income of $3.428 billion during the second quarter and net income of $489 million during the third quarter of 2020. Adjusted earnings of $4.13 billion underperformed the Refinitiv consensus estimate of approximately $6 billion and the second-quarter adjusted earnings of $5.534 billion.
Activist investor underscores Shell’s troubled past
Loeb said in his shareholder letter that Shell languished over the past 20 years with annualized stock returns of just 3% and declining returns on invested capital. According to GuruFocus performance chart statistics, Shell’s 10-year annualized return of 1.24% underperforms competitors like Chevron Corp. (CVX, Financial) and Exxon Mobil Corp. (XOM, Financial).
GuruFocus’ stock comparison table also suggests that while Shell has lower price-book and price-sales ratios than do Chevron and Exxon Mobil, Shell also has lower interest coverage and Altman Z-scores, suggesting low financial strength.
Additionally, Shell’s return on invested capital underperformed Chevron’s and Exxon Mobil’s returns in at least six years over the past decade.
Guru believes Shell can unlock shareholder value by breaking itself up into several businesses
Loeb discussed several shareholder views regarding Shell’s plans for the future, including the “paradoxical” views of investing in legacy oil and gas, bolstering renewable energy and shrinking to grow. Based on these views, the activist investor discussed an alternative plan that optimizes Shell’s corporate structure and matches the company’s business units with unique shareholder constituencies.
Loeb introduced an example in which the company can operate as two standalone businesses: its legacy energy business and its liquefied natural gas, renewables and marketing business. The former business allows the company to decelerate capital expenditures and sell assets. Shell can then invest in renewables and carbon reduction technologies using the proceeds and drive returns in the liquefied natural gas and renewables business.
Stock tumbles on earnings miss
Shares of Shell traded around $47.38, down approximately 5% from Wednesday’s close of $49.91. The stock is fairly valued based on Thursday’s price-to-GF Value ratio of 1.04.
GuruFocus ranks the company’s profitability 5 out of 10 on the back of profit margins and returns outperforming just over 53% of global competitors despite having a high Piotroski F-score of 7.
Gurus with holdings in Shell include Ken Fisher (Trades, Portfolio) and Hotchkis & Wiley.
