4. Royal Dutch Shell plc (NYSE:RDS-A)
Number of Hedge Fund Holders: 38
Price as of November 4, 2021: $44.88
Royal Dutch Shell plc (NYSE:RDS-A) is a multinational European energy company. The company has always been in the limelight due to climate activists and now recently due to activist investors. Daniel Loeb of Third Point LLC initiated a position in the company during the second and third quarter of this year as he believes that the stock of Shell is at a 35% discount against its competitors in the form of Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX).
The hedge fund believes that Shell should create separate companies by breaking up. One company can be involved in the upstream and refining segment, which are the legacy segments. The second business can cater to renewable energy, liquefied natural gas (LNG), and the marketing of energy products. According to Biraj Borkhataria at RBC, the total value of all Shell businesses considered separately is around $250 billion. However, the current market capitalization of the company stands at nearly $180 billion.
Investment management firm Third Point Management discussed its stance on Royal Dutch Shell plc (NYSE:RDS-A) in its Q3 2021 investor letter. Here’s what the fund said:
“Third Point initiated a position in Royal Dutch Shell (“Shell”) during the second and third quarters. The past two years have been especially challenging for Shell shareholders due to a major dividend cut and well-publicized court case that ordered changes to Shell’s business model. Stepping back further, it has been a difficult two decades for shareholders, with annualized stock returns of just 3% and decreasing returns on invested capital. However, despite the current sour sentiment, we see opportunity for improvement across the board at Shell.
Shell is one of the cheapest large cap stocks in the world, trading at under 4x next year’s EBITDA and ~8x earnings at “strip” prices. It also trades at a ~35% discount on most metrics to peers ExxonMobil and Chevron despite Shell’s higher quality and more sustainable business mix. Compared to its peers, Shell generates a much larger percentage of its cash flow and earnings from stable businesses that have a major role to play in the energy transition. For example, Shell is the largest global player in liquified natural gas (“LNG”), which is a critical transition fuel to move off carbon intensive coal-fired power generation. In 2022, we expect the company’s energy transition businesses (LNG, Renewables and Marketing) to generate EBITDA of over $25 billion with sustaining capex of only $5 billion. These businesses account for just over 40% of Shell’s EBITDA but would likely support Shell’s entire enterprise value if they were a standalone company. At the current share price, we believe investors are getting the remaining ~60% of EBITDA (upstream, refining and chemicals) for free.
Management has been gradually divesting assets that are not aligned with a low-carbon future such as upstream and refining. This is perhaps most evident in Shell’s refining business where the company went from owning 54 refineries in 2004 to only five (by yearend.) This is a remarkable accomplishment. Shell’s massive dividend cut and other asset sales (e.g. Permian) have left it with an under-levered balance sheet with year-end 2021 net debt to EBITDA of well below 1x. This positions Shell to return capital earlier and more aggressively than peers…” (Click here to see the full text)
On November 3, Bill Selesky at Argus increased the price target for Royal Dutch Shell plc (NYSE:RDS-A) from $46 to $54 and kept a Buy rating on the stock. The increase in price target is driven by an upward revision in FY22 EPS from $5.60 to $6.07 on the back of strong fundamentals of the energy sector.
