The biggest battle over Big Oil’s future has begun

The surprise win earlier this year by activist firm Engine No. 1 of board seats at Exxon Mobil was a watershed event in Big Oil’s ability to control the climate narrative as investors push for change. But the stake revealed this week in Royal Dutch Shell by Dan Loeb’s Third Point Management activist investor firm may say more about how energy giants balance business models in the future to hang on to higher return, cash-generating legacy fossil fuel projects while investing in renewable energy.

Loeb’s idea is simple: just break up the company. Put the oil and gas assets into a separate firm focused on returning cash to shareholders while setting up a renewable energy company to succeed on its own.

Is the sum of the parts going to be worth more than the whole in the future of the oil and gas business?

Loeb’s investor letter comments on Shell were not highly specific on how many companies would result from separating units like renewables, liquified natural gas and marketing from legacy exploration and production. But he made the case that Shell’s current approach of “do it all” ends up making it more difficult to attract shareholders.

In an earnings miss reported on Thursday morning, Shell said it, “welcomes open dialogue with all shareholders, including Third Point.”

Climate investing experts say this turn in the activist attention to oil is big.

“This is a significant development, because it will force Shell to answer a question that has been on the minds of investors for some time: do legacy oil companies like Shell actually add any value to the low-carbon transition? Is Shell becoming like an old-style conglomerate, where the whole is worth less than the sum of the parts?” said Andrew Logan, senior director, oil and gas, at climate shareholder advocacy group Ceres.

The opposite may be proven true: combining the cash flow of oil and gas assets under the same corporate roof as a high growth, investment intensive clean energy business Shell is actually building a stronger business than either of the two standing alone.

But no one knows the answer and at least Loeb has posed it.

“If nothing else, the move by Third Point signals that Shell has not convinced the investment community that there is value in keeping all of these businesses in house,” Logan said.

A recent sale by Shell of lucrative oil and gas assets in the Permian Basin highlights the issue.

The sale to ConocoPhillips fetched $9 billion — and where did the proceeds go? About $7 billion was returned to shareholders and an undisclosed part of the remainder would be included in overall spending and initiatives that include energy transition.

Shell told CNBC at the time of the deal that investors should not read too much into the majority of the deal proceeds going back to shareholders…