Management gurus parse companies into market leaders, challengers and followers. large oil and gas producers, such as royal dutch shell, have often been intelligent followers, given their financial advantages. but the energy transition has put paid to that. shell is shrinking as it adapts, by cutting 9,000 jobs. after vacillating for years on renewables, it is chasing leaders such as denmarks orsted in wind power and finnish biofuels refiner neste oil.
Rumours of job losses have circulated for months. the scale of the retrenchment is still shocking. more than a tenth of the workforce and a fifth of top management will go. shell does not plan to publish a full strategy update until february, long after rivals such as bp. it is hard to shake suspicions the group is being driven by events.
The pandemic has shaken many sectors. but shells agonies are also inextricably linked to the slow retreat of global capital from hydrocarbons. the group made a historic dividend cut in april and wrote down assets by $22bn a couple of months later.
Shells shareholder returns have suffered this year, dropping 55 per cent. that is well behind the msci all-country energy index and even bp. three years ago shells share valuation was in the middle of its peer range. it has since slid towards the bottom with an enterprise value below 5 times consensus forward ebitda.
The anglo-dutch group has promised cost reductions of as much as $2.5bn annually by 2022, before redundancy costs. that works out to more than $15bn in todays money, taxed and capitalised over a decade. though that is a sixth of shells market value, its share price hardly budged on the day.
Shell argues that it can integrate renewables to create new products. it hopes to use wind to create hydrogen fuel, for example. investors prefer to chase the pure play leaders orsted and neste oil. both have better returns on invested capital, according to bloomberg data.
The gap between renewables specialists and shell would be narrower if previous bosses had shown greater resolve. current management must regret the abandonment of the uks london array wind farm 12 years ago.
Shell and its peers can still use their large capital bases to squeeze themselves through the turnstiles of the energy transition. markets will not quickly reward them for following on so late.
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