Equity Position Update: Shell PLC (SHEL, Financial)
We initiated a position in Shell in the summer of 2021 and highlighted the company’s significant discount to intrinsic value as well as to US-listed peers after decades of poor performance. While shares have performed well since we initiated the investment, the company still trades at staggering discount to intrinsic value and represents a compelling investment at current levels. We initially argued (and still believe) that the fastest path to improved performance and better valuation would be a separation of Shell’s business units to better attract shareholders and improve accountability, the latter of which was essential when the company was in the hands of executives who had demonstrated virtually no focus on shareholder value creation.
The most important change at Shell over the past two years has been the upgrade in the management team, with the appointments of Wael Sawan as CEO and Sinead Gorman as CFO. They have demonstrated an unwavering commitment to shareholder value, capital discipline, and improved returns. At their recent analyst day, Mr. Sawan stated “underpinning all that we do will be a ruthless focus on performance, discipline, and simplification.” It was the third time they used the term “ruthless” in their presentation, sending a strong message to shareholders.
Mr. Sawan and Ms. Gorman are backing up their words with actions. In their brief tenure, they have already cancelled several projects with poor return profiles, eliminated meaningless targets that in many cases were divorced from economic value creation, and made it abundantly clear that Shell’s highest priority is generating a return for its investors by increasing shareholder distributions and paring back capital spending.
At just 7x consensus earnings, we see significant further upside in the stock. Enhanced focus and discipline will allow Shell to generate mid-teens shareholder returns via cash flow per share growth and dividends through the end of the decade, with additional upside potential portfolio actions. While Shell has so far insisted on maintaining its conglomerate structure, we see positive signs that it has arrived at a coherent and compelling strategy for value creation and believe the company is in the right hands to materially improve its standing relative to peers.
From Daniel Loeb (Trades, Portfolio)'s Third Point second-quarter 2023 letter.
