Stocks in Focus: Shell
This week James Ross-Russell of NW Brown focuses on Royal Dutch Shell.
This week I am writing on Royal Dutch Shell, a company we last wrote about in 2015, when it agreed to buy BG for a consideration of £47bn.
The integration of BG’s assets remains on track and with synergies from this deal and leveraging efficiencies, Shell has stripped $10bn of annual operating costs from its business. On top of this, the enlarged company is continuing to drive down its debt ahead of targets and has reduced capital expenditure by $20bn.
While the integration of BG’s assets is running to plan, Shell cannot rest on its laurels. A switch from fossil fuels to more clean energy sources over the long term will put pressure on demand. One example of this is the move of car manufacturers towards producing electric vehicles (EV) or hybrids. To counter the move away from fossil fuels, many of the big oil and gas companies are investing heavily in renewable energy solutions. Shell has committed to invest up to $1bn per annum in “new energy” by 2020, including an investment in hydrogen production to rival the EV market. While this is a fraction of their overall capital expenditure it shows that the company is trying to future-proof its business as the demand for oil inevitably falls.
Shell also highlights that there will need to be a stable source of electricity when wind and solar are not available. The management see gas providing this stability and have increased their liquefied natural gas (LNG) capabilities with the purchase of BG.
The success of Shell compared with its peers will be determined by how well it manages this switch to renewable energy sources. Any heavy investment now would be a drag on cash and the adoption rate for electric vehicles, for example, may be slower than anticipated. However if Shell delays investing in renewable energy it risks being left behind in a declining sector.
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