Largest European oil companies may fall into American hands.

Europe runs the risk of losing its largest oil companies to the United States.

The UK's Shell is the second biggest company on London's FTSE 100 index, making up 8.4% of its total market cap, while France's TotalEnergies is the fourth largest on the CAC 40 index at 6%. However, both have voiced frustration over the low value of their shares compared to US oil majors, and considered moving their listing to US exchanges.

Shell and TotalEnergies' stocks trade with a low price-to-cash flow ratio of 4.7 and 5.2, compared to 8.4 for Exxon Mobil and 7.6 for Chevron. A lower ratio indicates potential undervaluation.

Alastair Syme, managing director of global energy equity research at Citi, says these companies have long been undervalued. The gap reached its widest point around two years ago, mirroring a wider separation between European and US stocks.

TotalEnergies CEO Patrick Pouyanne stated last month his firm was "seriously" considering relocating to New York, and would address this with the board in September.

Shell CEO Wael Sawan told Bloomberg in March that his company was undervalued compared to Chevron and Exxon Mobil. If they couldn't close the gap, he said, they'd look into all options.

On a results call with analysts last week, Sawan said a move to Wall Street wasn't being discussed at the moment, and Shell was instead focusing on buying back its shares to raise their worth. The company announced a $3.5 billion share buyback over the next three months.

Leaving London's main stock exchange would be a blow, especially for the particularly embattled FTSE 100. Major companies like British chipmaker Arm have already left for other markets or chosen New York for their IPOs. Acquiring Shell and TotalEnergies would create a "full-blown crisis," especially for the London Stock Exchange, according to Chris Beauchamp, chief market analyst at IG.

London's loss would strengthen the notion there's one global stock market, with the US taking center stage and the rest seeming like a side note. BP, the FTSE 100's sixth largest company, may also follow if Shell leaves.

There was a time when moving TotalEnergies to New York would seem impossible, but with greater climate commitments and ESG issues, European shareholders are pushing companies to improve.

Last month, ex-Shell CEO Ben van Beurden said the firm was undervalued but would try to demonstrate the value of being a European energy company. "Energy transition is a massive value opportunity and not some sort of green cost we have to pay because we happen to be in Europe," he said at the Financial Times' Commodities Summit.

Syme at Citi states the likelihood of Shell and TotalEnergies leaving London is slim. "There is some advantage in having an association to a country," he says, pointing out some global energy companies may prefer to fly multiple flags above their industrial sites.

Implications

The potential departure of Shell and TotalEnergies from London's main stock exchange could create a market crisis, especially for the FTSE 100, where they make up a significant portion. While the idea of TotalEnergies re-listing in New York was inconceivable not long ago, European shareholders now expect more climate commitment and ESG standards from these companies. Syme states the actual odds of a shift are low, and some global energy firms prefer to demonstrate the value of being a European oil and gas company rather than leaving for the US. The UK government has also introduced a range of policies to boost the value of London's financial sector, making withdrawal less attractive.

If Shell does decide to leave, it could impact BP, the FTSE 100's sixth largest constituent. As of April 2023, BP shares have lost around 25% of their value since the start of the year. Despite reporting a lower-than-expected profit of $2.7 billion for the first quarter of 2023, due to a drop in oil and gas prices, they remain popular options as they're still perceived as more sustainable. However, the move to New York could bolster BP's value and increase investor confidence in their transition away from fossil fuels.

The UK government has introduced various policies to keep Shell in London. It's currently considering launching a new roadshow promoting its favorable tax environment to overseas companies. With the market feening for sustainable investment options, a move to the US could potentially harm Shell's reputation. Being associated with a country could still provide an advantage for some global energy firms, as they may find value in showcasing their commitment to their home country.