Why Shell Has Soured on The London Stock Exchange

By Alex Kimani - Apr 21, 2024

• British multinational oil & gas giant, Shell Plc has threatened to delist from the London Stock Exchange and list on the New York Stock Exchange.
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• Sawan has also expressed deep frustration by investors' under-appreciation of the financial performance of the company.
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• Shell still invested around 20% of its cash capital spending on low-carbon assets, compared to just 2% of cash that Exxon spent on low-carbon solutions.

A couple of days ago, we reported that scores of beleaguered solar companies in Europe are fleeing the continent amid intense competition from China and setting up shop in the U.S., thanks to the latter’s favorable solar and clean energy policies. Notably, Swiss solar module maker Meyer Burger has announced plans to wind up panel production in Germany and move to the United States after failing to garner support from the German federal government. Similarly, battery company Freyr has stopped work at a half-finished plant near the Arctic Circle and plans to relocate to the U.S. These companies hope to benefit from the 45X production tax credit (PTC) under the Inflation Reduction Act (IRA).

The exodus of European companies seeking greener pastures in America is, however, not confined to the solar sector. British multinational oil & gas giant, Shell Plc (NYSE:SHEL) has threatened to delist from the London Stock Exchange (LSE) and list on the New York Stock Exchange (NYSE). Shell CEO Wael Sawan has told Bloomberg that the company is grossly undervalued in London due to shareholder apathy to the oil and gas sector. 

Sawan has also expressed deep frustration by investors' under-appreciation of the financial performance of the company, as well as the British government’s over-taxation of its profits. Sawan has vowed to “look at all options”, including switching the group's listing to New York in a bid to close the valuation gap with American Big Oil companies Exxon Mobil Corp. (NYSE:XOM) and Chevron Corp. (NYSE:CVX). The company’s share price is now close to a record high at £28.51, thanks in part due to geopolitical upheavals of recent years that have supported higher gas and oil prices. Still, Sawan believes the shares are undervalued.

Sawan is not the first Shell executive to adopt this line of thinking. Former Shell CEO Van Beurden has revealed that back in 2021, the company had considered listing in the U.S. when it dropped its dual Anglo-Dutch listing and moved its headquarters to London. However, it decided that leaving Europe was “a bridge too far”.

To be fair, European energy companies, including Shell, have traditionally traded at a discount to their American peers. However, the gap has been widening in recent years. For instance, in 2018, Shell’s value including debt was around 6x EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization) while Exxon was valued at 7x EBITDA. Valuations for fossil fuel companies have gone south over the past years thanks to the clean energy transition. Still, Europe’s energy giants have seen their valuations deteriorate faster than their American counterparts: Shell is now valued at 4x EBITDA compared to 6x EBITDA for Exxon. 

Different business strategies could also explain the widening valuation gaps. In 2021, former CEO Van Beurden declared that oil prices would remain low forever, and aimed for an expected reduction in oil production of around 1% to 2% each year until 2030. Whereas his successor ditched that goal last year, Shell’s total oil and gas production in 2030 is expected to be roughly the same as in 2022. In contrast, Exxon’s oil output alone is set to grow at a 7% compound rate thanks to investments in Guyana as well as its recent $60 billion takeover of Pioneer Natural Resources. 

Meanwhile, Shell and its European peers continue investing heavily in renewable energy compared to America’s Big Oil companies. Despite Sawan’s efforts to scale back on green investments, Shell still invested around 20% of its cash capital spending on low-carbon assets, compared to just 2% of cash that Exxon spent on low-carbon solutions that primarily focused on capturing and storing carbon emissions. A big part of that is due to higher levels of climate activism in Europe. For instance,  earlier this year, green activists staged a protest outside Shell’s London headquarters after the company announced annual profit of more than $28bn (£22bn) for 2023, one of its most profitable years on record.

Coming To America

Shell is not alone. American bourses are increasingly proving attractive to European companies. The past couple of years has seen several European heavyweights, including plumbing and heating products company UK-based Ferguson Plc (NYSE:FERG), German chemicals company Linde Plc. (NASDAQ:LIN), Irish building and construction company CRH Plc (NYSE:CRH) and British betting company Flutter Entertainment (NYSE:FLUT), are moving to American exchanges while office co-working solutions group IWG is reportedly heading stateside, too.

More worryingly for the UK and Europe, fewer companies are joining their capital markets. Last year, LSE recorded just 23 IPOs, down from 74 in 2022. In contrast, the Americas saw a 155% surge in total IPO proceeds in 2023, with about 132 deals taking place across U.S. exchanges.

Whereas factors such as investor preferences, onerous policies and regulations in European markets and higher executive salaries have all been playing a part in this shift, NYSE’s vice chair John Tuttle says the biggest reason is simply because the U.S. stock exchange is the most attractive in the world.

“No matter how you look at the data, the United States has the deepest pool of liquidity and capital in the world, which has the broadest investor base. It has a lot of analysts and investors that are focused on growth, not just dividends and value,” Tuttle said at the World Economic Forum (WEF) in Davos.

Tuttle has also pointed out that companies that list in the US are eligible to be included in many indices that they would otherwise not access if listed in other markets, helping to bring in more capital, and a more stable shareholder base and ultimately increase their valuations.

By Alex Kimani for Oilprice.com