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Could Shell shares start to soar after its shock headquarters move?


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The Royal Dutch Shell share price has soared this year as the price of oil hits a multi-year high. Could its proposed move to London and accelerated green transition see it rise back to pre-pandemic heights?

Shell
Source: Bloomberg
 
 

At 1,684p today, the Shell (LON: RDSA) share price is down 5% in the past month. But it’s up 18% in the past six months, and 86% from its pandemic low of 904p on 2 October 2020.

But at the beginning of January 2020, it was 2,306p. This was less than two years ago. And as the share price has been steadily rising over the past twelve months, optimists believe it could return to this price before long. Booming oil prices, increasing investment in green energy, and this week’s announcement of a headquarters move could all be catalysts for further upwards movement.

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Shell share price: headquarters move

Like a younger sibling starting out at school, Royal Dutch Shell could soon be known by its surname only. The FTSE 100 energy giant plans to move its headquarters and tax residence from the Netherlands to London to make its share structure ‘simpler to understand and value,’ and to boost the ‘speed and flexibility’ of shareholder pay-outs.

Under the plans, CEO Ben van Beurden, CFO Jessica Uhl, and seven other senior employees will also move to the UK. The decision will be put to a vote on 10 December, requiring a 75% majority to pass.

One important consequence of the move is that Shell‘s complex dual-class share structure will be reduced to a single share structure. This is significant because in July, it announced a $7 billion share buyback funded from the sale of its US Permian Basin oilfield.

Under its current structure, Dutch-listed A shares are liable for a 15% dividend withholding tax, while UK B shares are not. Therefore, Shell is only purchasing UK B shares in the buyback. And as quarterly purchases of B shares are capped at 25% of average daily trading volume, this severely restricts share liquidity. Jeffries analyst Giacomo Romeo believes that the move to London is a ‘particularly important point because…the liquidity of the pool of shares available for buybacks will increase.’

If Shell does move out of the Netherlands, the share buyback will, in theory, accelerate, and the share price should rise. But what happens in practice could be more unpredictable.

Oil pump
Source: Bloomberg

Q3 2021 results

The headquarters move comes after US hedge fund Third Point bought a stake in the company and argued for it to be split into two ‘standalone companies,’ by spinning off its renewable energy business. However, van Beurden dismissed the idea, saying that Shell’s transition to net-zero ‘will be funded by the oil and gas business.’ And cynics could argue that the move allows the company to avoid the Hague’s ruling that ordered it to cut customer CO2 emissions by 45% by 2030.

But Q3 results underscore van Beurden’s reasoning. Last month, he commented ‘this quarter we've generated record cash flow ($17.5 billion), maintained capital discipline and announced our intention to distribute $7 billion to our shareholders.’ And much of Shell’s profits have come from the massive spike in oil prices. Brent crude is at a multi-year high of over $80 a barrel, and the Bank of America is predicting it could hit $120 a barrel by June next year.

And it is using some of these windfall profits to fund its green transition. Shell is aiming to cut traditional fuel production from 100 million tonnes to 45 million tonnes, with an ‘absolute emission reduction target of 50% by 2030.’ And within the next three years, it plans to expand its electric car charging points from 80,000 to 500,000 globally, while generating 2 million tonnes of sustainable aviation fuel.

In the long-term, this metamorphosis into renewables will dictate the future of the Shell share price. But in the short-term, increased share buybacks could potentially have a strong upwards effect. However, this assumes the headquarters move will be approved, oil prices remain high, and global monetary policy remains steady in the face of an unpredictable pandemic and rising inflation. Shell faces multiple moving factors, and not all of them can be controlled.

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Charles Archer | Financial Writer, London
18 November 2021

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