Ignoring the details: Going after the wrong Shell

Shell recently announced that it wants to make its shareholders happy, so it’s going to distribute a bigger chunk from its cash flows. This means Shell will pay a bigger dividend and buyback more of its own shares. Starting from the next quarter, it will spend $5 billion on buying back shares, instead of $4 billion.

But hold your horses before you go tweeting this out and then get called out for spreading misinformation. We are talking about Shell plc, the London based global company, and not about Shell Pakistan.

A similar mistake was made by the officers at Pakistan Stock Exchange (PSX) very recently so you must not feel so bad for yourself. 

On 19 June 2023 a groggy PSX regulator typed out an “Enquiry on News Published in Print/Electronic Media” and asked Shell Pakistan to answer for Shell Plc’s CEO Wael Sawan’s plan to make the British company’s stocks shinier. This letter was written in reference to a news item that appeared in Pakistan’s Business Recorder headlined “Shell boosts dividend, steadies oil output under new CEO’s plan”. 

Despite six various factual indicators in the article screaming that this is about Shell plc’s new CEO Wael Sawan’s efforts at taking the company forward, Hafiz Maqsood Munshi, who heads compliance at PSX, thought it best to write to Shell Pakistan Limited as an initiation of an official inquiry. 

Naturally Lalarukh Hussain-Shaikh, the Company Secretary sent an extremely polite response confirming that PSX had mistakenly and perhaps unfortunately misread the article itself. “In light of the aforementioned news item, you have drawn Shell’s attention to the requirements of Clauses 5.6.1 (a) and 5.6.2 of the PSX Regulations; however, after careful examination, it is to clarify that the news article does not pertain to Shell Pakistan, and relates to Shell plc. Therefore, the information presented in the news item does not relate to Shell Pakistan’s activities, decisions, or future plans.” 

Perhaps had PSX done a “careful examination” of the BR article, there would have been no need for this correspondence to take place. However, it did happen and Shell Pakistan’s rather polite clarification was added to a never-ending pile of responses sent by companies to enquiries of potential market manipulation, simply saying “Sorry, we have no idea how the market is moving.”

So far this was funny and we were all laughing. However, this is serious regulatory business; on average the PSX sends out a few of these notices almost every day in efforts to maintain fair and equitable market conditions. But if the guards are sleeping on watch then who is watching the guards?

Remember Shell announced earlier this month that they will be exiting the Pakistani market by selling more than 77% of their market shares. And so one would naturally expect the market to react, and the market indeed reacted, as Shell’s stock price shot upwards from Rs 89 to Rs 116 by 20 June 2023. But when you actually look at the graph and zoom out a little, this upward journey really began somewhere between 2nd and 5th June. After hitting a 6 month low at 68 on 29 May, the stock price began steadily and then sharply increased after 3 June 2023. It rapidly reached 76 on 5 June 2023 and then began to exponentially rise after 12 and 13 June 2023, which is a day or two before Shell officially announced its intention to exit. 

Expecting the bare minimum from from one of the most robust and historically well performing stock exchanges (while simultaneously maintaining a series of well documented efforts at market manipulation), one would assume that the PSX would have sent out a letter of enquiry or notice to the company sometime around 2nd to 5th June 2023. PSX regulations bind the companies listed with them to disclose any price-sensitive information immediately in order to keep things fair and square. When such a clarification is not already available and a movement is noted, PSX sends in a reminder to the company to be immediately notified; more than 16,000 of such entries are listed on their website. 

But one is left to wonder why the share price is soaring in the first place. If a company announces that it is about to sell more than 77% of its shares, the supply of these shares has suddenly increased in the market so by simple rules of economics the price should naturally go down. However, it did not, why?

Shell Petroleum Co is divesting from Pakistan because of a plethora of reasons but one of them is that Pakistan right now is a bad market. Why is this creating a positive market signal for its share price to rise?

There is a peculiar legal reason to deduce what could be driving the share price forward. The Securities & Exchange Commission of Pakistan (SECP) wants to protect the small shareholders in big businesses. So for example in the case of Shexit from Pakistan, whoever the potential investor is, will be bound by the law to ensure that the minority shareholders are also offered an equal opportunity to exit at a premium. So for example, if Saudi Aramco decides to buy the more than 77% shares that Shell is divesting from in Pakistan, they will have to offer the same deal to the rest of the 23% shareholders. The SECP essentially makes it compulsory for the acquirer to make an offer to buy at least half of the shares held by the minority shareholders.

This could mean that it is entirely possible that Shell got in conversation with a potential buyer and made the announcement only after reaching a satisfactory level of post-announcement certainty. This means the demand for shares will now rise, because the potential investor will have to make a public offer for the rest of the shares as well .

When it comes to sifting the wheat from the chaff, the PSX is comparable to a headless chicken at the task, that is, it seems they can’t or won’t take notice of real cases of market manipulation if their lives depended on it. Despite placing an upper hold on trading after a mysterious 25% rise in Shell Pakistan’s closing share price between 1 June 2023 and 6 June 2023, the regulator should have sounded alarm bells, considering long standing chatter surrounding a Shell sale has reached a precipice earlier this year after Shell’s parent company signaled a desire to end operations across a number of territories, with industry insiders predicting the only roadblock to a sale was finding a buyer for the oil marketing supermajor. What’s shocking is the regulators turned a blind eye to the lack of disclosure around potential sale between 1 and 6 June 2023.

Surprisingly, PSX did not request disclosures regarding the openly reported source of the sudden spike. It seems like the regulators were the stereotypical stockbrokers who were so busy counting their money they forgot to do their jobs.

Two weeks later, Shell Pakistan was officially on the market, ready to be gobbled up by a hungry buyer and everyone wanted a piece of the pie. 

Shell Pakistan’s parent company, Shell Petroleum Company Limited, announced its decision to exit Pakistan after 76 years of operation on 14 June 2023. An exploration of these reasons is another story, which we published earlier this month –  a compounding economic crisis, foreign exchange losses, Dollar outflow restrictions, and Shell’s global strategy to simplify its portfolio. 

With the stock price evidently rising since 3 June, it is clear that someone out there knew of Shell’s intention before the official announcement was made and PSX missed out on a real opportunity of doing their job.

For the average investor who is playing fair and taking their bankers’ advice, These are the kind of games some influential stock market investors play while laughing all the way to the bank while their incompetent and possibly corrupt friends at the PSX are having a fun time doodling.