Shareholder activism

The package of announcements from Shell will send a shiver through the oil and gas industry. After years of resisting investor pressure for more immediate gratification, the company which more than any other regards itself as a social institution dedicated to the long term, has blinked. Capex is to be radically reduced. Costs are to be cut with a sharp knife. $15bn of assets are to be sold – enough in themselves to form a medium sized company. And the dividend is to be increased. There is a touch of theatricality in combining a profits warning with a dividend increase but the show satisfied the immediate audience. The shares rose. For the rest of the sector, Shell’s ability to deliver in this way poses a dangerous challenge.

Underperformance is endemic across the industry. Investment always needs to be increased, the rewards are always promised for tomorrow. Among investors are innumerable funds whose need for cash returns is urgent. Since the downturn of 2008 the market has clearly become more short term and less tolerant of those who live on promises of a golden future which is always just over the horizon. Under pressure Shell has been able to make the adjustment, demonstrating that it can quickly cut enough to deliver a material and sustainable dividend increase even when oil and gas prices are flat to falling. That is a real measure of strength, as is BP’s ability to absorb a loss of $50bn to pay the bill for Macondo. Very few companies in the world have that capacity. Read more

Carl Icahn’s purchase of a 5 per cent stake in the Canadian company Talisman Energy marks the entry of activist shareholders into the energy business. Could it indicate the beginning of a revolution?

Activist shareholders have a bad reputation, particularly in Europe where they are seen as asset strippers who pull apart good businesses for a short-term gain. That can happen but they can also be very productive in forcing companies to examine very hard what they are doing with their shareholders’ money. Read more