The LSE Losing Giants Like Shell Is a Very Real Threat
The risk of losing Shell’s listing to New York is a bigger threat to the City of London than missing out on a few IPOs.
Ever since Brexit, the City of London has been worried about its declining role in global finance. Those concerns were most conspicuously realized in the London Stock Exchange’s failure to win last year’s biggest initial public offering — by a British company, no less. But the more substantial risk involves the bourse’s current members.
You don’t have to take my word for it. Listen to Wael Sawan, chief executive officer of Shell Plc, by most measures the biggest London-listed company: He’s ready and willing to look elsewhere to give his undervalued shares their due.
The problem here isn’t Brexit. It’s European investor apathy — if not outright hostility — toward fossil fuels. Once, natural resources giants like Shell saw London, chock full of mining and energy businesses, as their natural home; today, not so much. Instead, the US, now the world’s biggest oil producer, beckons.
And if Shell does leave, it probably wouldn’t be a one-off. The company is the largest constituent of the FTSE 100 index and the pressure on BP Plc — the fifth-largest index member — to follow would be enormous1. Add to the potential leavers Glencore Plc, the commodity trading firm with a big coal business, and that’s three of the top 10 FTSE 100 firms. Shell and BP aren’t just big companies in London, but huge dividend payers — stalwarts for the income investors who are such an essential part of the UK equity market.
When I spoke to Sawan in Houston in March, he refreshingly admitted that not everything was alright in the UK. “I have a location that clearly seems to be undervalued,” he said, trying to explain the gap between London-listed Shell and its arch rivals Exxon Mobil Corp. and Chevron Corp., both listed in New York.
For now, Sawan’s solution isn’t switching the listing, but fixing Shell: He’s in the midst of what he callsa “sprint” of 10 quarters to cut costs, shed underperforming units and devote free cash to buying back shares2. “You can worry about the gap — or you could buy the gap,” he said. “I will keep buying back those shares, and buying back those shares, at a discount. That’s a fantastic investment opportunity.”
It sounds great. But investors have heard it before. His predecessor, Ben van Beurden, spent much of his tenure promising to bolster shares in similar ways. He didn’t. Fortunately, Sawan’s team has been far more aggressive in overhauling the business, so they have a greater chance of succeeding.
But what if, by mid-2025, close to the sprint’s finish line, the valuation gap remains? Sawan made clear nothing is taboo, including switching the listing to New York. “If we work through the sprint, and we are doing what we are doing, and we still don’t see that the gap is closing, we have to look at all options,” he said. “All options,” he added for emphasis.
He may succeed, and Shell may never leave the London Stock Exchange. But the risk for London is far higher than what the market – and exchange officials – perceive. I expect the gap to persist simply because there are fewer buyers of oil stocks in Europe than in the US. Companies should list their shares where investors welcome them, and where they are properly valued – neither of which is currently true for fossil-fuel firms and the UK.