The Royal Dutch Shell (LON: RDSB) share price will be in the spotlight today in London as investors reflect on the new activist pressure. The stock declined by almost 1% in London on Wednesday but it soared by more than 2% in the US OTC market.
Third Point and Shell
Third Point is a hedge fund that was started by Daniel Loeb. It has more than $18 billion in assets. In a letter published on Wednesday, the fund said that it had acquired $500 million shares of the company. This makes it a substantial shareholder of the company that has a market capitalization of more than $180 billion.
Dan Loeb believes that the Shell share price is undervalued. To create more shareholder value, he recommended that the company should break itself up into two. One business will have its clean energy products like natural gas. And the other firm should have its traditional oil products.
It is easy to see why Third Point is interested in Shell. For one, while its stock has bounced back lately, it has underperformed its peers. It has risen by about 40% this year while the Vanguard Energy ETF has risen by about 60%. Crude oil has risen by almost 70% this year. Individually, companies like Chevron and Exxon have done better.
At the same time, the Shell share price is undervalued. For one, a DCF calculation by Simpy Wall St shows that the stock is undervalued by about 35%. Additionally, the company has some of the best dividend yields in the oil market and has some of the best returns in the industry. The management has pledged to boost payouts as long as oil prices remain supportive.
It is unclear whether Shell’s management will be open to the idea of breaking the company. However, investors could be open to the idea. In a note, an analyst at JP Morgan said:
“Investors have generally pushed back against the hybrid model and are looking for ways to see these companies crystallize value.”
Shell share price forecast
The weekly chart shows that the Shell share price has been in a bullish trend in the past few months. However, its bullish momentum has faded as the stock has declined in the past two straight weeks. Still, the stock has moved to the 61.8% Fibonacci retracement level.
It has also moved above the key resistance level at 1,500p. The stock will likely gain momentum as investors reflect on the new activist proposals. The next key level to watch will be at 2,000p.
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