- There’s a logic to the oil majors – BP, Shell, Exxon – keeping their fossil fuel businesses to finance the move into renewables
- There’s also logic in their splitting the businesses so that shareholders do the capital allocation
- Lord Browne, formerly of BP, advises that splitting is the way to go
Now of course this is just one opinion but Lord Browne, formerly of BP PLC (LON: BP) is advising that the oil majors should split into fossil fuel and renewables companies. This would mean BP, plus say Royal Dutch Shell PLC (LON: RDSA) and Exxon Mobil Corp (NYSE: XOM) splitting into at least two companies each. One would be the legacy fossil fuels businesses, the other new and exciting forays into renewables.
The logic of this can be run either way. In fact, we see the logic of this being explored in the spat between Eliott Advisors and SSE PLC (LON: SSE). There it’s the retail business which plods along nicely, throwing off cashflow, which can then be invested in the capital hungry renewables. Or, the cash be returned to shareholders and the renewables carry their own weight by raising funding in the market.
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This is the same strategic question for the oil majors. So, Shell, BP, Exxon, what is it that they should be doing? At some point over the next few decades, we know that the fossil fuel business is going to be markedly smaller than it is now. We’re also pretty sure that vast, tens of billions of $ projects, to open up new basins aren’t really going to be necessary. Possibly they won’t even be allowed.
So, those legacy businesses of Shell, BP, Exxon and the other majors. At some point, the investment requirements for them start to drop away. But they’ll be throwing off cash all the same – that would have been reinvested in new fields but now won’t be. So, what to do with those rivers, floods, of cash?
One idea is that Shell, BP, Exxon, would still like to survive as corporations, so take that cash to invest in the new, the renewables. To provide corporate longevity.
The other view of this is that the aim is to maximise shareholder value. That’s what a company is therefore after all. This might well mean actually splitting the two businesses. Not particularly because there’s something wrong with renewables, or good about fossils and all that. Rather, corporate splits would allow shareholders to choose which portion of the business they’d prefer to have.
Some shareholders would prefer to have the high dividend stream – but low to no capital growth – of those old fossil fuel businesses as they go into run off. That cash stream from Shell, BP, Exxon, would be paid out in dividends and there are investors looking for 10 and 30-year dividend streams without worrying too much about capital positions at the end of it. Pensions collectors, for example, might be interested in this.
Similarly, other investors might well like the idea of capital hungry businesses now but which will increase in value over the years. Pensions savers perhaps, might be more interested in the renewables business.
Which is actually the correct answer depends, well, really it depends upon what shareholders really want. This is though going to be – as with SSE – an increasingly discussed option for the oil majors. There will be significant price changes in Shell, BP, Exxon and the rest as it becomes more mainstream. Which way the conversation finally goes is unknown but there could be substantial value unlocked the more the split idea becomes mainstream.
