Could a break-up send Shell shares surging?

Over the past 18 months, investors in Shell (LSE: RDSB) shares have had a tough time. When the pandemic struck at the beginning of 2020, shares in the oil and gas giant plunged as the price of oil collapsed. 

Investors might have been hoping that, as the price of oil recovers, the stock would have followed suit. That has not happened. Shares in Shell are changing hands at around 1,680p today, compared to 2,300p at the beginning of 2020.  

As one crisis has receded, another has emerged. Shell and its peers in the big oil sector are now coming under increasing pressure to reduce their emissions.

To try and force these companies into action, investors are avoiding polluting sectors. This is having a significant impact on valuations across the industry. 

And now, Shell is facing pressure from a major hedge fund to break itself up to improve its stock price performance. 

Under attack 

Wall Street hedge fund Third Point is ‘attacking’ the oil and gas company. The firm wants Shell to put its oil and gas assets in one business and its renewables division into another separate entity. Third Point believes this strategy will encourage investors to reward the renewables business with a higher valuation, as it will be easier to understand. 

Shell’s management has pushed back against this idea, arguing the cash flows from the oil and gas business are providing essential funding for expanding the renewables portfolio. However, the company has now announced that it is going to simplify its dual share class structure. 

Under this arrangement, the company is effectively a corporate citizen of two different countries, the UK and the Netherlands. This structure had its uses, but it creates extra bureaucracy. It can also make it difficult for Shell to execute corporate transactions, such as acquisitions, sales, share buybacks, and even business separations. 

I do not think this move will lead to a break-up of the corporation as Third Point envisages. But I do think it is a step in the right direction. A simplified business model will make it easier for the company to develop and grow. 

At the same time, Shell is pushing ahead with its renewable energy and visions. The company is investing billions over the next few years to build out its renewable energy business and reduce its reliance on oil and gas. It still has some way to go, but I am encouraged by the group’s progress so far. 

The outlook for Shell shares

As such, I would buy the stock for my portfolio today, considering its low valuation and potential. While it seems unlikely the group will break itself apart to improve its valuation, the corporate reorganisation will provide management with more flexibility. Further, as the company builds out its renewable energy business, the market may well reward the enterprise with a higher valuation. 

Even though I believe the company is an attractive investment opportunity for me, it does come with risks due to its exposure to the hydrocarbon sector. As pressure grows on governments to act against climate change, this could increase the cost of doing business for Shell and reduce profitability.