HOT AIR BALLOON FLIGHT

By Julia Horowitz • Thursday, October 28

Good morning. In today's newsletter: An activist investor wants to break up Shell, claiming it "can't be all things to all people." Plus, chip shortages are still pummeling automakers, and cigarette sales rose during the pandemic.

 

US stock futures are up after the Dow and S&P 500 retreated Wednesday. Markets in Europe were mixed in early trading, while stocks in Asia pulled back.

 

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EYE ON OIL

Should Shell be broken up? An activist investor thinks so

As world leaders prepare to gather in Glasgow for the COP26 climate summit, an activist investor is telling one of the biggest oil and gas companies it needs to change, fast.

 

What's happening: Hedge fund Third Point just revealed that it has built up a stake in Shell and will push the oil giant to break up into two separate firms in a bid to attract more investors.

 

"In our view, Shell has too many competing stakeholders pushing it in too many different directions, resulting in an incoherent, conflicting set of strategies attempting to appease multiple interests but satisfying none," Third Point's Daniel Loeb said in a letter to investors dated Wednesday.

Loeb points out that Shell's stock is incredibly cheap for its size, and the company is set up better than many of its peers to take advantage of the energy transition. Shell has said its oil production peaked in 2019 and will now decline by 1% to 2% annually.

 

But Loeb emphasized that the company is stuck between competing impulses from investors and policymakers. Some want ongoing investment in oil and gas to keep energy prices low, while others are asking Shell to invest more aggressively in renewable energy.

 

"As the saying goes, you can't be all things to all people," Loeb said. "In trying to do so, Shell has ended up with unhappy shareholders who have been starved of returns and an unhappy society that wants to see Shell do more to decarbonize."

 

The pitch: Third Point thinks Shell should split into "multiple standalone companies," separating its legacy oil and gas business from units focusing on liquified natural gas and renewables.

 

Yet Shell's executive team is skeptical. 

 

"If you were to split that into component pieces, I think that can sound really interesting from a financial perspective," Jessica Uhl, Shell's chief financial officer, said Thursday. "But in terms of real solutions, I think that breaks down and our ability to integrate and bring these different pieces of the puzzle together will be how we uniquely make a difference in the energy transition."

 

Investor insight: Shell's stock is up more than 40% year-to-date, boosted by the rally in fossil fuel prices. Yet shares are still significantly lower than where they started 2020.

 

They fell back further Thursday after the company reported disappointing earnings results.

 

Shell also announced tighter emissions reduction targets for its own operations, saying it would aim to reduce absolute emissions by 50% by 2030. Earlier this year, a Dutch court ruled that the company had to move faster to slash emissions both from its own operations and from the energy products it sells.

 

David Bianco, chief investment officer for the Americas at DWS Group, said the problem with investing in oil and gas companies right now is they have to pump large chunks of their profits into pivoting their businesses in order to ensure they'll still be around in 30 or 50 years.

 

And if there's a firm that makes it?

 

"Its priority won't be shareholders. Its priority will be survival," Bianco told me. "The long-term for energy is a very, very concerning outlook, from an investor perspective."

 

Watch this space: Executives from Shell, ExxonMobil, BP and Chevron will testify at a blockbuster hearing before Congress at 10:30 a.m. ET. The focus will be on their role in spreading climate disinformation. 

VOICES

Is Corporate America to blame for Facebook's problems?

"The major advertisers have a lot of guilt here."

 

EARLY FACEBOOK INVESTOR ROBERT MCNAMEE

 

Read more from CNN Business.

EARNINGS MONITOR

Chip shortages are still pummeling automakers

Supply chain problems continue to batter automakers, which are struggling to lock down computer chips and other crucial components they need to build vehicles.

 

The latest: GM said Wednesday that revenue plunged nearly 25% to $26.8 billion in its most recent quarter despite record high car prices. The number of cars GM sold worldwide tumbled 27%. 

 

After markets closed on Wednesday, Ford said its automotive revenue fell 4% from a year ago.

 

But earnings weren't as bad as investors had feared. Ford's shares are up 8% in premarket trading on Thursday.

 

Taking stock: Supply chain issues have plagued automakers for months, forcing them to temporarily shut down production at some plants and limiting their ability to capitalize on high demand.

 

Stellantis, formed by last year's merger of Fiat Chrysler and French automaker PSA Group, said Thursday that the chip shortage led to a 30% loss of planned production last quarter, or about 600,000 vehicles.

 

Companies are betting they can weather the storm. Ford raised its outlook for future earnings and restored its dividend, which it suspended in March 2020. GM said that its full-year earnings should be at the upper end of the range it gave at the start of this month.

 

Yet they warned that problems could continue for some time.

 

"We do see the chip issue continuing to run through [2022]," John Lawler, Ford's chief financial officer, told analysts Wednesday. "It could extend into 2023, although we do anticipate the scope and severity of that to reduce as we move through [2022]."

UP NEXT

Caterpillar, Hershey Foods, Keurig Dr. Pepper, Mastercard and Molson Coors report results before US markets open. Amazon, Apple, Starbucks and US Steel follow after the close.

Also today: The first read of US third quarter GDP arrives at 8:30 a.m. ET.

 

Coming tomorrow: Earnings from Chevron, Colgate-Palmolive and ExxonMobil.

 

👀 Don't miss this: Today at 12 p.m. ET, CNN Business presents "Foreseeable Future: Housing Market Madness."

 

Join CNN's Christine Romans for a conversation with Barbara Corcoran, followed by a panel discussion with Redfin CEO Glenn Kelman, Cadre CEO Ryan Williams and Realtor.com CEO David Doctorow. To reserve a spot now, RSVP here.

WHAT WE'RE READING AND WATCHING

▸ ECB to keep buying bonds as it leaves rates unchanged (FT)
▸ Uber teams up with Hertz to offer Teslas to drivers (CNN Business)
▸ Celebrities and higher prices boost McDonald's (CNN Business)
▸ VC: Men who take 6 months of parental leave are 'losers' (Bloomberg)
▸ Likes, anger emojis: Behind Facebook's News Feed (CNN Business)
▸ The child care crisis is crimping the US economy (AP)

FINAL WORD

Cigarette sales in America were falling. Then the pandemic hit

When the pandemic arrived, some people tried at-home workout classes or tested new recipes. Others turned to their vices.

 

Cigarette sales in America rose for the first time in two decades last year, according to a new report from the Federal Trade Commission.

 

It was only a slight 0.4% increase, my CNN Business colleague Allison Morrow reports. The total number of cigarettes sold to wholesalers and retailers nationwide increased by about 8 million. But it marks a surprise reversal of a long-running downward trend.

 

Step back: US adult smoking rates have been falling since 2000, and now stand at about 14%, according to the North American Quitline Association, a nonprofit that promotes tobacco-quitting services.

 

The group credits that steady decline to tobacco taxes and smoke-free air laws, as well as growing use of assistance programs. But during the pandemic, fewer smokers were taking advantage of those services, the group said in a report earlier this year, citing "stress and anxiety resulting from the pandemic."

 

Investor insight: Altria, which makes Marlboro cigarettes, noted in a recent earnings call that the 2020 lockdowns saw Americans "add nicotine occasions to their day."

 

Its stock is still lagging the broader market, though. The company's shares are up 16% this year, compared to a 21% increase in the S&P 500.