Royal Dutch Shell Needs To Get This Right

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About: Royal Dutch Shell plc (RDS.A), RDS.B
by: Gaurav Agnihotri
Summary

Shell has a diversified energy portfolio.

Shell's performance is dependent on the combination of oil and gas prices.

Shell needs to expand its New Energies business.

If there is one thing that the Royal Dutch Shell (RDS.A) (RDS.B) needs to do right, it is to increase its focus on ‘New Energies business’ (a part of its Integrated Gas Division) through new investments. Royal Dutch Shell is well known for making the right strategic moves at the right time, and I have always said (in my earlier articles on the company) that it is one of the best energy stocks for long term investors. In fact, one thing that clearly differentiates Royal Dutch Shell from its biggest energy rival Exxon Mobil, is its diversified energy portfolio and less dependability on oil prices and its cyclicality.

This is one of the reasons why Royal Dutch Shell has been able to consistently outperform the markets, irrespective of oil price movements. But markets were taken by surprise in 2Q19, when Shell’s profits plummeted by a massive 25% as compared to 1Q19. The biggest reason for this downfall was Shell’s Integrated Gas earnings which fell by 60% on a YoY basis (because of weak gas markets and weak Asian demand).

Image Source : 2Q19 Earnings Result

In my previous article on Shell (which I wrote in August 2019), I had predicted that the company’s stock may fall further as global gas demand was expected to remain weak even in 3Q19. Since publication, the stock has fallen by 5.41%. This trend clearly highlights that Shell’s performance is dependent on the combination of oil and gas prices and the market demand. If both oil and gas markets remain weak, then even the company’s Downstream division will not be able to support its overall financial performance. This clearly means that Shell needs to focus on strengthening its new energies portfolio which is not dependent on oil and gas prices.

Is Shell focusing on its New Energies business?

For a diversified company like Shell, it is imperative to embrace change and focus on working towards energy transition. In fact, other European energy majors like BP Plc are already working on strengthening their Alternative Energy portfolio which consists of renewable fuels, renewable power and related products. Shell has also started working on further diversifying its portfolio by planning to increase investments in new energy technologies. In fact, Shell has declared that it is focusing on reducing its ‘Net Carbon Footprint’ ( in line with Paris Agreement) by increasing the number of ‘low carbon’ products in its energy portfolio. By year 2050, the company has set a goal of reducing its carbon footprint by around 50%, which is highly ambitious in my opinion!

According to its 2Q19 earnings report, Shell acquired Sonnen which is one of the global leaders in providing smart energy storage systems to households in Europe and U.S. Besides, Shell launched its first electric vehicle (EV) charging service in Singapore. With this strategic move, Shell entered the growing EV- charging market of South East Asia. Shell has also tied up with a company called Insolar in Brazil to provide solar power to community buildings in Rio De Janeiro. Developments like these prove that the company has its new- energy aspirations on right track, but the destination is still far away!

Conclusion

I say the destination is far away when I look at the company's recent deviation from Paris Agreement. According to a report form Carbon Tracker, Shell is one of the energy companies that have invested in non- Paris compliant projects in 2018! This includes Shell’s $13 billion LNG investment in Canada. Interesting! Although I believe that it is important for an energy-driven company like Shell to expand and strengthen its traditional energy portfolio, deviating from Paris agreement contradicts the company’s core value of contributing towards a sustainable development.

Summing it up, Royal Dutch Shell has a lot to do as far as its clean- energy ambitions are concerned. There is no doubt that Shell has succeeded in diversifying its conventional energy business. It also has a massive operating cash flow and a generous dividend pay-out which makes it very attractive for investors. However, the company needs to put more efforts towards diversifying its ‘new energies’ business, if it wants to reduce its carbon footprint by 50% in next 3 decades.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.