These Are Not the Earnings We're Looking For, Part LXXI
Producers are having their bluff called in their third quarter reports of 2021. None other than Royal Dutch Shell came under criticism from Third Point hedge fund manager Dan Loeb who has taken a position of $500 million to a $1billion in the company. What producer bureaucrats have done to themselves is quite evident in a series of articles on the subject. To start things off Mr. Loeb sent an Investor Letter that stated.
Shell has too many competing stakeholders pushing it in too many different directions, resulting in an incoherent and conflicting set of strategies attempting to appease multiple interests but satisfying none.
At this point no concrete actions are recommended by Mr. Loeb, such as new directors or proxy action. He did suggest that as many as four divisions, or separately traded entities should be the result of the breakup of Shell. I see this more as an invitation for other investors to join him. The title of the CNBC article is “Shell vs. Dan Loeb: It’s Open Season for Investors on Big Oil’s Future,” spelling out a rather interesting next few months.
People, Ideas & Objects have been arguing that producer moves into clean energy investments are unauthorized and wholly unacceptable. If investors believed in clean energy they’d sell their oil and gas producers and buy into the clean energy industry. They don’t need bureaucrats to make those decisions for them. Nor do they ever desire to have bureaucrats make changes in the focus of the organization, whether that is a change into clean energy or to compete with WalMart. I’m still waiting for the fire proof set top boxes for Enron’s broadband Internet service. Taking revenues from oil and gas to fund other businesses is inappropriate, should never be done and certainly never without the express authorization of shareholders. Of the North American based producers, I’ve seen none of them authorized in such ways. The facade of a board of directors vote in last year's Exxon annual meeting I feel was a contrived effort to show the world that Exxon was moving into the clean energy direction at the behest of its shareholders. Again if shareholders want to invest in clean energy there’s nothing stopping them. Reflected in the CNBC article Shell’s bureaucratic attitude is on display.
“A very significant part of this energy transition is going to be funded by the legacy businesses that we still have,” Shell CEO Ben van Beurden said on the call with reporters from multiple publications on Thursday. “If you want to exclude us from it, I don’t think it will go as fast as it would otherwise go.” Being able to replicate its strategy would be more difficult across multiple companies, he said, but the argument that the balance sheet of the legacy firm is critical to energy transition remains harder to prove in the short-term when the majority of its cash management goes back to shareholders as in the Permian deal.
The Permian deal was Shell selling all of its Permian assets to Conoco for $9 billion. $7 billion of which was a dividend and $2 billion was believed to be committed to clean energy. Later in the same article it shows the pickle that bureaucrats have put themselves in. Why People, Ideas & Objects are against the diversion of oil and gas revenues. And why it's no longer acceptable that corporations make these types of decisions on behalf of their shareholders, since at least the 1980s.
The traditional ethos of the oil and gas investor is to hold the stock with the expectation that you will suffer through bad years in the cycle when oil prices are low but when things go back up you will be rewarded and compensated for the additional volatility risk. And because of that, “it’s hard to say we won’t be able to compensate you now, you have to be patient,” Dalman added.
Shell is the first producer to be faced with the fact that any diversion of revenues from oil and gas into clean energy is never going to fly. This Forbes article, which is as consequentially titled as the CNBC article, “One Foot on the Dock, Why Breaking Up Shell May be Just the Beginning” goes into great detail as to why Loeb’s Third Point hedge fund is acting in its best interest in suggesting the breakup of Shell. Forbes analysis is based on the history of many other such attempts in other industries and their failed outcomes. Although it does not mention Enron’s broadband investment.
Recently in congressional hearings Shell’s North American President Gretchen Watkins did her best deer in the headlights routine when a congresswoman presented her with a mason jar full of M&M’s to demonstrate Shell’s capital expenditures in clean energy vs oil and gas. Not taking the opportunity to fully explain her point about reliable energy investments, and the mortal dependence the congresswoman's constituents had on the reliability of oil and gas. This is the failure of all the producer bureaucrats and they’re therefore the product of their own undoing. As Dan Loeb indicated, their conflicting objectives make them mute and unable to utter a coherent statement. Particularly in the face of such ridiculous presentations involving M&M’s. Their past promises to oil and gas investors who built these companies with the other “stakeholders” Loeb is discussing, are not fulfilled when the fruits of their efforts are used surreptitiously by unaccountable bureaucrats. But the ultimate conflict comes about by the fact that this entire contrived clean energy initiatives were alleged to have been at the behest of their shareholders. So now they’ll either have to ignore these same shareholders who bureaucrats claimed told them to focus on clean energy? Or tell the world their shareholders are now lying and their story has changed by wanting to break up the company.
Notably Loeb stated the oil and gas part of Shell was being valued at close to nothing. When the CEO’s hide from their job of selling what it is they’re doing, pretending to be in other businesses, why would anyone place any value on that. Bureaucrats should welcome the changes that Loeb is initiating. It provides them with their much sought after and welcome home in clean energy. A clean divorce from dirty oil. A place where they’ll be able to live in peace and harmony with the environment and save the planet. Able to continue with their well entrenched “muddle through” and “do nothing” strategy and operating procedure in their chosen clean energy business. Well not so fast, they’re now stuck in startup organizations with no revenues and little prospects of profitability or ability to generate value. Let’s wish them luck nonetheless.
This is their ultimate conflict and contradiction. Shareholders have been demanding producers build value for them where their dividends and yields are competitive in the North American capital markets. In addition, shareholders have demanded producers begin using tier 1 ERP providers, of which the Preliminary Specification uses Oracle Cloud ERP as the base of our solution. Investors are aware of the nature of the accounting related problems in the industry. Investors are fully aware of the nature of how they were treated pre 2015. Investors know that producers can’t, won’t and will not ever approach the oil and gas business constructively. Bureaucrats don’t know how to make money and the damning consequence of the long term effect of this is their culture has no understanding of why, how or what to do to make a profit. They don’t have the necessary ERP systems available to tell them to determine what’s profitable and what’s being produced at a loss. The devastation they’ve orchestrated throughout the primary, secondary and tertiary industries affiliated with oil and gas are all severely damaged. For the past four decades the only prosperous area of the industry is the innovative executive compensation that has been paid to those who never had anyone but their own interests in mind. Those who had the responsibility and authority to profitably build the industry, and those who chose to silence and eliminate anyone that raised any issues.
Will investors be successful in their desire to break up these firms between clean energy and oil & gas? The ultimate message investors can send to management is to cut off a firm's funding. Oil and gas investors began doing this in 2015. Six years of “muddle through” later we see nothing has been done to acknowledge or address the specific issues and deal with the concerns their investors raised. The only thing leadership did was declare their favored shale investment and all of oil and gas to be untenable, prompting their move to clean energy. Diverting revenues to unauthorized and unrelated businesses where they have no competitive advantages, capacities or capabilities. Industries that have been proven to be financial sinkholes. Therefore I think it’s clear what will happen. Bureaucrats will be sent packing to their preferred destination. When the alleged leadership has other ideas and a direction that is counter to the business they’re in, don't listen or act, what choices are there? None. The entire oil and gas industry in North America and its secondary and tertiary industries have been devastated and cannibalized by the lack of profitability being generated in the producer firms. Bureaucrats may think they deserve another chance, I think that opportunity passed them by many decades ago. Back when they were passing their management off as value generating, when they culturally slipped into the abyss of not knowing what profits are, where they were being made or lost or how exactly to earn them within their organizations. Instituting a culture unwilling to change for any purpose and never at the behest of their investors. Their investors they’ve refused to respect or even acknowledge their existence. All in order to ensure the bureaucrats franchise of self aggrandizement remained intact. But then I’m biased. The one thing I hope to see more than anything is the officers and directors asking for a seat at the table. And as I was told by them when I initially proposed the use of the Joint Operating Committee in August 2003, they may find they’re “persona non grata.”
On the other hand we have no shortage of work to do. Much needs to be done in the next few years. The Preliminary Specification needs to be built. The engineering and geological explicit knowledge needs to be captured as Intellectual Property and developed. New oil and gas firms need to be formed, capitalized and organized. Assets need to be transferred to these new producers in innovative, strategic and tactical ways. In this process we’ll all be helping the current producers to travel faster down their chosen journey to clean energy by disposing of dirty oil. This transition to the Preliminary Specification is something that must be done to deal with the financial difficulties the industry is plagued with from the current administration. This also needs to be done as preparation for the future. And to learn from the experience of this transition as we’ll be faced repeatedly with situations that share this same scope and scale of change in the near future of this business. We’ll therefore be somewhat prepared and experienced in challenges of this nature. Please review our Production Rights to see how everyone can participate in making this new oil and gas industry happen. An industry where it will be less important who you know, but what you know and what you're capable of delivering, what the value proposition is that you’re offering?
Those interested in joining our user community are People, Ideas & Objects priority and focus. The Preliminary Specification, our user community and their service provider organizations provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations, everywhere and always. Setting the foundation for profitable North American energy independence, everywhere and always. In addition, our software organizes the Intellectual Property of the exploration and production processes owned by the engineers and geologists. Enabling them to monetize their IP for a new oil & gas industry to begin with a means to be dynamic, innovative and performance oriented. Providing a new investment opportunity for those who see a bright future in the industry. A place where their administrative, accounting, exploration and production can be handled for the 21st century. People, Ideas & Objects have joined GETTR and can be reached there. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here.