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Shell warns hedge funds risk derailing energy transition

Royal Dutch Shell’s chief executive has warned that replacing long-term shareholders with hedge fund investors risked derailing the energy sector’s transition plans at a critical moment in the climate crisis.

The comments by Ben van Beurden follow a decision this week by one of the world’s largest pension funds to sell its entire holdings in fossil fuel companies and come a day after it was revealed that Daniel Loeb’s activist fund Third Point had called for Shell’s break-up.

“It is disappointing [and] actually I don’t think this makes any positive difference for the energy transition,” van Beurden said of the divestment announcement from ABP of the Netherlands, adding that Shell had not been informed of the decision in advance.

“We prefer to have long-term investors in our share base with whom we can talk about our strategy, who we can dialogue with on how to tune it up,” he said. “Replacing long-term thoughtful investors by, say, hedge funds is not necessarily for the benefit of the energy transition either, because they typically do tend to have a different philosophy when it comes to owning us.”

Chief financial officer Jessica Uhl said Shell’s investor relations team had held “very preliminary discussions” with Third Point over the past year but had no further information about the hedge fund’s intentions.

Third Point, which has built a stake in Shell over the past 12 months, said in a letter to shareholders this week that it had urged the energy major to split into “multiple companies” to deliver better value through the energy transition. Those separate companies could include, for example, a legacy oil, refining and chemicals business, and a gas, renewables and marketing business, it said.

Speaking after the release of Shell’s third-quarter results, in which earnings fell to $4.1bn from $5.5bn in the previous quarter, van Beurden stressed that Shell believed its integrated business model offered the best chance of success.

“Without companies like us, with our skills, scope and scale to convert the energy system to a cleaner and lower-carbon energy system, I think you can safely say the energy transition is going to be a whole lot more difficult,” he said.

The lower than expected earnings, even as cash flow from operations hit a record $17.5bn, reflected the “adverse impact of Hurricane Ida and lower contributions from trading and optimisation, partly offset by higher oil and gas prices”, Shell said.

Uhl said the lower contributions from the marketing division, which is central to Shell’s energy transition plans, were “not structural issues” but the result of unusual supply problems in its LNG business that had forced it to buy from the spot market as gas prices reached record highs.

Shell published a new strategy in April to become an integrated energy provider with net zero emissions by 2050 by focusing on the customer and working backwards to deliver the low-carbon solutions its clients need.

But the company is under pressure on all sides. A court in The Hague ruled in May that Shell needed to reduce its carbon footprint faster and ordered it to cut all emissions, including scope 3 emissions released when its products are burned by customers, by 45 per cent by 2030.

Shell strengthened its climate commitments on Thursday, pledging to reduce absolute emissions from its own operations, known as scope 1 and scope 2, by 50 per cent by 2030 compared with 2016 levels.

The company said it would continue to make “best efforts” to reduce its scope 3 emissions, as required by the court, but could only include emissions under its direct control in its new target. “That’s an important step in meeting the court case,” van Beurden said, adding that Shell was only appealing against the ruling because “we don’t believe this is an effective way to tackle climate change”.

Shell has already said it plans to allow its oil production, which peaked in 2019, to decline by 1 to 2 per cent a year as it shifts spending to renewable energy and other low-carbon technologies such as hydrogen.

The company last month sold its Permian shale oil business in Texas for $9.5bn and promised to return $7bn of that to shareholders. The distribution of those funds, which comes on top of buybacks announced in the second quarter, would happen next year after the deal completes, Shell said on Thursday.

“Not the cleanest set of results this morning given a number of one-offs impacting earnings, however from a [cash flow] perspective, Shell reported strong results,” said Biraj Borkhataria at RBC Capital Markets. “Given the news around the activist investor yesterday, we’re not sure investors will put much weight on these new [emissions] targets.”

Shell’s results came as French oil and gas major TotalEnergies reported better than expected adjusted net income of $4.8bn and predicted that high gas prices would continue in Europe and Asia for the next six months.

“We’re benefiting from a very good environment,” said chief executive Patrick Pouyanné.

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