City nerves jangle when FTSE giant feels unvalued
Net zero is still decades away, but we have spent endless hours imagining what a world would be like without oil.
London’s stock exchange bosses, on the other hand, face a more immediate and worrying oil crisis: namely, life without Shell.
After moving to the UK two years ago, Britain’s largest company is now considering leaving for New York.
London, according to Wael Sawan chief executive, devalues his company. It cannot provide capital, and its politics and taxes are unpredictable. Even having a London-based address can bring down his share price.
In an interview with Bloomberg published on Monday, he stated: “I have a property that seems to be clearly undervalued.”
He promised to continue cutting costs in order to boost the share price of his company, but said that if this did not work then “we will have to consider all options.” “All options.”
It is not the first hint he’s made. He reflected last July on the warm reception he received from the New York Stock Exchange when he met with investors to present Shell’s plans for cutting costs and maximising profits.
“The welcome that we received there was exceptional.” “The Shell flag was flying next to the New York Stock Exchange Flag,” he said.
Sawan’s colleagues think that moving to the US would be absurd. Ben van Beurden’s predecessor told the FT Commodities Summit last week in Lausanne: “The company was massively undervalued… the share price is at an historic high but could have been significantly higher.”
Sawan and van Beurden are concerned that Shell’s stock is not valued as highly as its American counterparts.
He’s correct on the surface. Exxon, Chevron and other US oil giants listed in New York have shares valued between 12-13 times their earnings. Shell’s shares are valued around nine times its earnings.
US Oil Rivals Perform Better
Ashley Kelty, analyst at Panmure Gordon, says that Shell’s stock price is lower due to the negative sentiment toward oil and gas companies in Europe and their aggressive green agenda.
The demonisation and hatred of energy companies is not conducive to investment.
Many UK equity funds have now adopted rules governing environmental governance, which prevent them from investing oil and coal stocks. The US market is more supportive of fossil-fuel companies.
Shell is left with a much smaller pool of potential investors because international investors have shunned the UK market.
Shell investor: “One of many reasons Shell is where it’s at is that the UK market was a no go area for international investors.”
Low share prices can make companies more vulnerable to criticisms, shareholder unrest, and even takeovers. Shell’s rival BP recently attracted interest from UAE state oil company.
A share price that is in freefall also threatens to destroy the legacy of CEOs who wish to be remembered for their achievements as titans of the industry and not as losers from London as one analyst put it.
Shell’s current London valuation is £185bn. AJ Bell analyst Dan Coatsworth says that if Shell’s share price was in line with US competitor ExxonMobil the group would have a value of nearly £260bn – a 40% increase.
It is a simplistic analysis that does not take into account different assets or accounting standards.
Shell has always had divided loyalties. In 1907, Shell was formed by a merger between Shell Transport and Trading (a UK-based company) and Royal Dutch Petroleum. Some of the company’s management remained in Europe decades later.
This led to a few awkward years in the 1940s, when the UK firm strongly supported the Allied War effort while supplying Hitler’s Military with a German subsidiary.
Shell decided recently to eliminate confusion about its identity. Shell decided to end its confusion in identity by removing the “Royal Dutch”.
It was a huge show of support for a government that is in the middle of Brexit. Kwasi Kwarteng, the then-business secretary, hailed this as “a clear vote of confidence in British economy”.
However, since then, the commitment issues of the company have returned.
The group’s ownership structure makes it anything but British. About half of the group’s institutional shares are owned by American funds managers. Only 29pc is held in the UK.
Bloomberg data shows that when retail shares are included, UK ownership is 17pc lower than the US at 56pc.
Blackrock and Vanguard, two US funds alone, hold nearly 15pc Shell’s shares.
Shell’s size makes it important for Britain and the company to remain in London. It is the second largest stock on the British market in terms of value and pays out 9pc (of all dividends) paid by FTSE 100 firms, only behind HSBC.
Money managers own shares in hundreds of UK funds. These funds are used to pay UK pensioners, and also help the next generation prepare for retirement. The funds depend on the dividends paid by the company.
New York may be a better option, but it could also deprive the funds of their income because they have to adhere to rules that prohibit them from investing outside of FTSE indices.
“For many income fund, it’s a big deal. It’s a good time to think: What if BP or AstraZeneca did the same? “This is a momentous occasion,” says a second Shell investor.
Sawan’s remarks come at a moment when London is already dealing with fears that the stock market in London is in a “doom spiral”.
Many major companies have left: the building materials suppliers Ferguson, CRH and Flutter are planning similar moves in New York and Germany. Tui is also moving to Germany. Arm Holdings – a leading UK chip designer – chose to list on NYSE rather than London last year.
Shell’s exit would be a serious blow to the industry.
The second shareholder said, “The dam would have been broken.” Why would you list in the UK, if everyone’s leaving? Why would you jump on a ship with a leak?
It is not only the City of London that should be concerned about a moribund stock exchange. John Foster, Chief Policy Officer at the CBI says: “Having large, thriving companies listed and based in the UK is crucial to the success our economy.” They drive innovation, investment and provide the tax revenue we need to fund our public services.
Shell’s move across the Atlantic is not a guarantee of success. Only 3.5pc is made up of oil and gas stocks in the US index compared to 10pc or even 11pc for the UK. Shell would be a smaller player in a larger stage.
The US also has a higher risk of litigation. Paul Benson is a senior attorney at ClientEarth, a NGO that specialises in legal actions for environmental goals. He said: “According Shell’s annual report, as of December 2023, the company faced 24 lawsuits in US.
This means that the legal actions will not be the reason for the company to relocate to the US.
Analysts suggest that Sawan’s sabre rattling may be a clever double-bluff designed to boost the share price of the group.
Shell’s first investor: “If your share price seems to be undervalued, then why not give the impression that you are thinking of moving to New York?” It will make you reconsider selling Shell.
Since the comments, shares have risen by nearly 5pc.
Shell would need to have the support of at least 75pc shareholders to go ahead with its New York plan.
In an interview with Bloomberg, Sawan acknowledged that the high hurdle was “a reason why we didn’t feel it was a battle worth fighting”.
Shell’s spokesman stated that Sawan’s remarks about moving to New York “were very similar to those made in an interview with a high profile nine months ago”, but “a change of listing was not a priority”.
“That is still the case,” they said. Shell’s leadership will not be distracted by the current debate and is committed to delivering its strategy, which includes continued operational improvements, simplification of business, and financial discipline.