While Shell Resists Breakup, Rivals See Opportunity From Spinoffs Italy's Eni and other European energy conglomerates are spinning off parts of their low-carbon energy assets or considering such moves to boost returns

Royal Dutch Shell PLC is standing firm against Third Point LLC's call for a breakup of the oil giant to retain and attract investors. But that isn't stopping Eni SpA and other European energy conglomerates from targeting similar moves to boost shareholder returns.

Shell has defended its integrated strategy by saying its legacy oil-and-gas assets are needed to fund its investments in lower-carbon energy.

But Daniel Loeb’s Third Point says the structure is too unwieldy to value Shell. Instead, the U.S.-based activist suggests the company, which plans to consolidate its dual British and Dutch structure and relocate its headquarters to London, should consider separating its legacy operations from its renewables investments to boost returns and accelerate carbon-dioxide-emission reductions.

The standoff shows the challenges energy companies face maintaining their record of dividend payouts while managing the more recent pressures of reaping full value for their increasing investments in green energy.

Eni’s solution: spinning off a minority stake of its retail energy and renewables business next year through an initial public offering.

The move isn’t as extreme as the breakup Third Point is pushing for at Shell, but the aims are similar: Simplify the company’s structure, in this case, to attract a higher valuation and a lower cost of capital. That will allow the spun-off company to raise money more cheaply to expand the alternative energy business as more investors bet on growing demand for low-carbon assets over fossil fuels like oil and gas.

Analysts and investors say it is too early to know if Eni’s IPO strategy will succeed over the longer term. It has paid off so far, with the stock outperforming Shell and other European rivals BP PLC and TotalEnergies SE since the plan’s approval in October.

The move by Rome-based Eni “is a potential experiment for the rest of the sector, and if investors are receptive, we expect others to follow suit in the coming months and years,” said Biraj Borkhataria, a London-based analyst at RBC Capital Markets.

Spain’s Repsol SA is another major oil producer considering splitting out its low-carbon assets, and it is expected to make a decision next year. Spanish electricity utility Iberdrola SA in July indicated it may list part of its offshore wind-farm business in an IPO.

Eni’s renewables business oversees a network of wind-farm and solar-power projects across parts of Europe, the U.S., Asia, Australia and Africa. The company aims to expand its installed capacity of renewable energy to 60 gigawatts in 2050 from 1 gigawatt last year.

That business’s potential value suffers because it is dwarfed by the company’s lower-growth traditional oil-and-gas business, measured by operating profit.

Eni’s enterprise value trades at 3.5 times to its estimated earnings before interest, taxes, depreciation and amortization, according to S&P Capital IQ. By comparison, Denmark-based wind-farm operator Oersted A/S and U.S. alternative energy giant NextEra Energy Inc. each trade around 16 times that profit measurement.

Eni didn’t disclose a valuation target for the new business when it detailed financial forecasts for the new company on Nov. 22.

Eni’s shares have risen 3.6% since the IPO announcement, while Shell’s have declined 1.3%, France’s TotalEnergies has slipped 0.8% and BP is 1.2% lower.

The recent outperformance of Eni’s shares relative to its peers shows that the spinoff plan has played a central role in the stock’s strength, said Giacomo Romeo, an analyst at Jefferies International.

Spanish infrastructure and energy company Acciona SA has already demonstrated some of the benefits of a spinoff. In July, it listed a minority stake of its business that builds and operates wind- and solar-power projects. Corporacion Acciona Energias Renovables SA trades near 25 times its projected earnings estimates, above the parent company’s multiple of 22 times.

By spinning off low-carbon assets, integrated energy companies create businesses that can appeal to institutional investors like the Ford Foundation and Dutch pension fund Horeca & Catering. These institutions are part of a growing number that are ending investments in fossil fuels or selling assets to help reduce global warming.

In September, Horeca & Catering sold out of its €250 million, equivalent to $283 million, worth of fossil-fuel stocks including Eni, Shell, BP and Exxon Mobil Corp.

The fund, which oversees €16 billion in assets, would still be allowed to consider investing in Eni’s low-carbon business following its spinout into a separate publicly traded company. That assumes any revenue from oil and gas was less than 50% of the total, said Bas van Ooijen, a senior investment manager at the fund.

The Ford Foundation said a month later it planned to end fossil-fuel investments and that the move could undermine future returns. Horeca & Catering said its analysis shows no significant difference in its overall returns over the long term whether oil-and-gas stocks were included or excluded from its portfolio.

“There will be more cases where [integrated] companies will see an issue between what independent [alternative energy] players are valued at and the value of their low-carbon assets, especially as these businesses grow,” said Mr. Romeo, the analyst at Jefferies.

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