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Shell Shares Crash: COVID-19 Breaks The Super Major Business Model

May 04, 2020 12:13 PM ETShell plc (SHEL)BP, BPAQF, CVX, RYDAF, RYDBF, TTE, TTFNF, USO, XLE, XOM80 Comments
Josh Young profile picture
Josh Young


  • In continuing a review of oil majors and the impact of government Covid-19 responses to their business models, we look at Shell.
  • Shell cut its dividend for the first time in 70 years.
  • More cuts should be coming by other majors.
  • Shell's poorly timed acquisition of BG was disastrous.

This is the second of what may be a series of articles regarding the stresses on the Super Majors' integrated business model. The starting point remains similar, but super majors businesses are cracking in different ways. Ultimately, their dividends are unsustainable, their capital efficiencies are challenged at best, and the world needs much higher oil and much better management of oil and gas assets across the value chain. Shell (RDS.A RDS.B) displayed this recently with their 66% dividend cut, the first cut in 70 years.

But first, the background from my article Covid-19 Breaks the Super Major Business Model - Chevron is an Avoid is a good starting point:

With oil near its 100 year inflation adjusted low in the midst of government mandated demand shut down, investors are looking for ways to get upside exposure to a rebound in price. Speculative interest has intensified as the broader market has rebounded. Open interest in poorly structured oil ETFs like USO (USO) and oil equity ETFs like XLE (XLE) has spiked. And the combination of ETF and company specific buying has propped up the shares of integrated oil super-majors like Exxon (XOM) and Chevron (CVX).

Integration historically provided super majors like Exxon and Chevron an economic buffer from the cyclicality of the industry, going back to the days of Rockefeller at Standard Oil. Controlling much of the value chain through "integration" meant that in oil price booms, the majors could cash in on their oil production. While in price busts, midstream revenues could remain steady and refining, chemicals and/or retail (gas stations) could generate excess cash flow - driven by increased demand and margins from lower priced oil and products.

The business model was brilliant and innovating and implementing it made Rockefeller the "richest person ever." However, it did not build

This article was written by

Josh Young profile picture
Josh Young is the Chief Investment Officer of Bison Interests, an investment firm focused on publicly traded oil and gas companies. And he is the former Chairman of the Board of Iron Bridge Resources, which sold to Warburg Pincus and CPPIB backed Velvet Energy in 2018 for $142 million. He is a value investor primarily focused on energy stocks, natural resources stocks, and companies trading at low multiples to earnings, cash flow, or book value. He has presented at numerous investment conferences, including Platts, LD Micro, Oil & Gas Money, Louisiana Energy Conference, and the Global Resources Investment Conference and has been featured in media including Barrons, Bloomberg, Business Insider, Fox Business News, RT and Oil & Gas Investor Magazine. He is a graduate with honors from the University of Chicago in economics.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Important Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment adviser capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC filings, and consult a qualified investment adviser. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication and are subject to change without notice. The author and funds the author advises may buy or sell shares without any further notice.

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