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The surprise win earlier this year by activist firm Engine No. 1 of board seats at Exxon Mobil was a watershed event in Big Oil’s ability to control the climate narrative as investors push for change. But the stake revealed this week in Royal Dutch Shell by Dan Loeb’s Third Point Management activist investor firm may say more about how energy giants balance business models in the future to hang on to higher return, cash-generating legacy fossil fuel projects while investing in renewable energy.

Loeb’s idea is simple: just break up the company . Put the oil and gas assets into a separate firm focused on returning cash to shareholders while setting up a renewable energy company to succeed on its own.

Is the sum of the parts going to be worth more than the whole in the future of the oil and gas business?

Loeb’s investor letter comments on Shell were not highly specific on how many companies would result from separating units like renewables, liquified natural gas and marketing from legacy exploration and production. But he made the case that Shell’s current approach of “do it all” ends up making it more difficult to attract shareholders.

In an earnings miss reported on Thursday morning, Shell said it, “welcomes open dialogue with all shareholders, including Third Point.”

Climate investing experts say this turn in the activist attention to oil is big.

“This is a significant development, because it will force Shell to answer a question that has been on the minds of investors for some time: do legacy oil companies like Shell actually add any value to the low-carbon transition? Is Shell becoming like an old-style conglomerate, where the whole is worth less than the sum of the parts?” said Andrew Logan, senior director, oil and gas, at climate shareholder advocacy group Ceres.

The opposite may be proven true: combining the cash flow of oil and gas assets under the same corporate roof as a high growth, investment intensive clean energy business Shell is actually building a stronger business than either of the two standing alone.

But no one knows the answer and at least Loeb has posed it.

“If nothing else, the move by Third Point signals that Shell has not convinced the investment community that there is value in keeping all of these businesses in house,” Logan said. The $7 billion Shell decision that explains a lot

A recent sale by Shell of lucrative oil and gas assets in the Permian Basin highlights the issue.

The sale to ConocoPhillips fetched $9 billion — and where did the proceeds go? About $7 billion was returned to shareholders and an undisclosed part of the remainder would be included in overall spending and initiatives that include energy transition.

Shell told CNBC at the time of the deal that investors should not read too much into the majority of the deal proceeds going back to shareholders rather than into renewable energy. “This sale was a one-off event and thus the decision on proceeds was also treated as such,” a Shell spokeswoman stated in an email. And she stressed that the company has outlined a capital spending plan that increases focus on its renewable energy business. But she also alluded to an issue about investor returns that remains tricky: “We are steadfast on disciplined capital deployment and going after investments that will have the highest value and returns.”

To date, and especially with oil prices rising back to a decade-high, it’s the legacy fossil fuels business which generates the highest returns.

It was not long ago that headlines in the press highlighted the market cap of utility company NextEra Energy, which has aggressively invested in renewables, surpassing that of ExxonMobil . With the oil cycle turning back to a boom, that’s no longer the case.

“Throwing money right away into the alts space may not be the right answer for Shell,” said Peter McNally, global sector lead covering energy at Third Bridge.Energy in the future will be a much broader potential business model than the narrow model of exploring for liquid fuels and producing them, but delivering energy in the power sector is a different business than fossil fuels. Renewable energy returns aren’t high This past summer, Norse energy giant Equinor , which has been at the forefront of the transition to renewables, lowered its expected rate of return from its offshore wind projects […]

source Shell vs. activist Dan Loeb: The biggest battle over Big Oil’s future has begun

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