Morningstar - Q3 2021 - 25

Dispatches
off for many investors in 2020, as thematic
funds climbed to new heights, but some of the
same individuals will likely get burned when
the fortunes of the more popular themes inevitably
wane and investors swarm for the exits.
Ben Johnson, CFA, is director of global exchange-traded
fund research at Morningstar Research Services LLC. He is
a member of the editorial board of Morningstar magazine.
TRENDS
Surge in SPACs Not a Flash in the Pan
Shell Loses Its Moat
GREATER EUROPE
United Kingdom
Oil giant Shell RDSB:GB has been stripped of
its narrow moat rating in a decision that highlights
Morningstar analysts' lower expectations
for oil prices over the next decade and the overall
uncertainty about renewable energy.
Analyst Allen Good explains the thinking behind
the downgrade in a recent analyst note:
" Our forecast for excess returns has become too
low while the company's future uncertainty
is too high to award a moat. "
The FTSE 100 company now is rated as having
no economic moat, which negatively affects
Morningstar's valuation, but that is partially offset
by higher oil prices. The overall result: Morningstar
has lowered its fair value estimate for Shell
to GBX 1,940 per share from GBX 2,250. The stock
is still undervalued, trading at GBX 1,357.40
as of June 18, but its Morningstar Rating has
dropped from 5 stars to 4 stars.
" Shares still appear cheap at a discount of nearly
25%, " says Good. " However, given a lower
yield and less oil exposure, Shell might lag in
an oil price rally. "
Good acknowledges that the downgrade might
appear to be a quick reversal, given that
Shell was upgraded to a narrow moat rating
just a few years ago, but circumstances
have changed. At that time, integrated oils,
The initial flurry of special-purpose acquisition
companies in 2020 seemed like a flash in the
pan at first, but it looks like these vehicles
are here to stay. The unprecedented uptick in
SPAC IPO volume in 2020 and the first quarter
of 2021 has created a dedicated pool of
more than $200 billion to invest in privately
owned companies-and that figure does not
even include the private investments in
public equity that accompany many of these
acquisitions. While we saw a few indicators of
waning enthusiasm for SPACs near the end
of 2020 with a handful of downsized SPAC IPOs,
this development looks to be just a blip.
U.S. Equity Funds
114.14
14.67
Sector Funds
<0.11%
Prospectus Net Expense Ratio
0.11-0.20 0.21-0.30 0.31-0.40 0.41-0.50 0.51-0.60 0.61-0.70 0.71-0.80 0.81
SPAC IPOs exploded in 2021, with aggregate
capital raised already surpassing the total
in 2020 by 19.8% in just over one quarter. Recent
SEC scrutiny regarding SPACs has led to
uncertainty around any potential accounting
treatment of warrants, which seems to
have caused a temporary halt on new IPOs;
however, as it stands now, we believe
SPACs still fill a gap in the market, will adapt
to any changes, and remain a primary
option for companies looking to go public.
Cameron Stanfill, CFA, is a senior venture capital analyst
at PitchBook.
14.41
Global SPAC IPO Activity
Capital Raised via SPAC IPO
$120B
100
80
60
40
20
0.5
*Data as of 04/15/2021.
Source: PitchBook.
0.2
0.4
1.3
2.1
1.6
6.1
11.5
16.8
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021*
92.9
SPAC IPO Count
400
111.5
329
300
200
100
including Shell, had made significant headway
in reducing operating costs in their existing
production base and capital intensity of
new projects. Given oil price assumptions at
the time, Morningstar analysts forecast
that Shell could earn adequate excess returns.
" While Shell has managed to maintain
improvements, the uncertainty of excess returns
10 years from now has increased due to
the changing composition of the business and
potential level of commodity prices, " Good
explains. " In short, we have neither the confidence
that Shell's plan to transition to a more
renewable and low-carbon business will create
competitive advantages nor that commodity
prices will consistently be at levels sufficient to
generate excess returns during the next 10 years. "
morningstar.com/lp/magazine
25
Morningstar - Q3 2021

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