Third Point Management, an investment management firm, published its third-quarter 2021 investor letter – a copy of which can be downloaded here. A portfolio return of +12.5% was delivered by the flagship Offshore Fund, bringing year-to-date returns to +29.5%. You can take a look at the fund’s top 5 holdings to have an idea about their best picks for 2021.
Third Point Management, in its Q3 2021 investor letter, mentioned Royal Dutch Shell plc (NYSE: RDS-A) and discussed its stance on the firm. Royal Dutch Shell plc is a The Hague, Netherlands-based oil and gas company with a $263.03 billion market capitalization. RDS-A delivered a 31.36% return since the beginning of the year, while its 12-month returns are up by 73.08%. The stock closed at $46.16per share on October 29, 2021.
Here is what Third Point Management has to say about Royal Dutch Shell plc in its Q3 2021 investor letter:
“Third Point initiated a position in Royal Dutch Shell (“Shell”) during the second and third quarters. The past two years have been especially challenging for Shell shareholders due to a major dividend cut and well-publicized court case that ordered changes to Shell’s business model. Stepping back further, it has been a difficult two decades for shareholders, with annualized stock returns of just 3% and decreasing returns on invested capital. However, despite the current sour sentiment, we see opportunity for improvement across the board at Shell.
Shell is one of the cheapest large cap stocks in the world, trading at under 4x next year’s EBITDA and ~8x earnings at “strip” prices. It also trades at a ~35% discount on most metrics to peers ExxonMobil and Chevron despite Shell’s higher quality and more sustainable business mix. Compared to its peers, Shell generates a much larger percentage of its cash flow and earnings from stable businesses that have a major role to play in the energy transition. For example, Shell is the largest global player in liquified natural gas (“LNG”), which is a critical transition fuel to move off carbon intensive coal-fired power generation. In 2022, we expect the company’s energy transition businesses (LNG, Renewables and Marketing) to generate EBITDA of over $25 billion with sustaining capex of only $5 billion. These businesses account for just over 40% of Shell’s EBITDA but would likely support Shell’s entire enterprise value if they were a standalone company. At the current share price, we believe investors are getting the remaining ~60% of EBITDA (upstream, refining and chemicals) for free.
Management has been gradually divesting assets that are not aligned with a low-carbon future such as upstream and refining. This is perhaps most evident in Shell’s refining business where the company went from owning 54 refineries in 2004 to only five (by yearend.) This is a remarkable accomplishment. Shell’s massive dividend cut and other asset sales (e.g. Permian) have left it with an under-levered balance sheet with year-end 2021 net debt to EBITDA of well below 1x. This positions Shell to return capital earlier and more aggressively than peers…” (Click here to see the full text)
Based on our calculations, Royal Dutch Shell plc (NYSE: RDS-A) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. RDS-A was in 38 hedge fund portfolios at the end of the first half of 2021, compared to 36 funds in the previous quarter. Royal Dutch Shell plc (NYSE: RDS-A) delivered a 13.78% return in the past 3 months.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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Disclosure: None. This article is originally published at Insider Monkey.
