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The oil price has recovered from Covid-19 but Shell’s share price hasn’t. What’s going on?

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Oil pipes in an oil field
Image source: Getty Images.

Oil prices have staged a remarkable recovery recently. Since late October, the price of Brent Crude oil has jumped from around $40 per barrel to over $60 per barrel. This means that the price of the commodity is now back at pre-Covid-19 levels.

Shares in oil major Royal Dutch Shell (LSE: RDSB) have not staged the same kind of recovery, however. While Shell shares have risen significantly since late October, the share price remains about 40% below the level it was trading at in January 2020. So, what’s going on here? Why is Shell’s share price still depressed if oil has rebounded?

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What’s up with Shell’s share price?

One possible reason Shell’s share price remains depressed is that renewable energy has really come into focus over the last year. 

New US president Joe Biden, for example, wants to spend nearly $2trn over the next 10 years on renewable energy, in order to make the US a 100% clean energy economy with net-zero emissions by 2050.

This focus on renewable energy means that oil companies like Shell are likely to face structural challenges.

Shell has made a few small moves on the renewable energy front in recent years. We’re likely to hear more about its renewable strategy in the company’s 2021 Strategy Day tomorrow.

However, right now, the FTSE 100 giant is still very much seen as an oil company. This will be affecting sentiment towards the stock.

ESG investing

Another factor that could explain Shell’s lack of share price momentum is the increasing focus on environmental, social and corporate governance (ESG) strategies within the investment community.

Today, many large institutional investors are completely avoiding sectors such as oil in order to meet ESG requirements. Lower demand for the stock due to ESG concerns could be impacting its share price.

Dividend cut

Finally, there’s last year’s dividend cut. In the past, Shell was viewed as a very reliable dividend stock. And for good reason – the company had not cut its payout since World War II. As a result of this incredible dividend track record, it was owned by many investors, including large global institutions, for income.

However, after slashing its payout by nearly 70% last year, the company does not have the same dividend appeal now.

I’ll point out that Shell does still pay a dividend. It also recently hiked its quarterly payout by 4% and said that it is committed to a progressive dividend policy.

However, the payout is considerably lower than it was this time last year. Additionally, there is now more uncertainty over future payouts now that the track record is gone.

I imagine this is also affecting the share price.

Can Shell’s share price recover?

Looking ahead, for Shell’s share price to fully recover, I think the company needs to show that it is serious about renewable energy. A recovery is not guaranteed. There are likely to be challenges ahead, in my view. 

I’ll be interested to see what the company says at its Strategy Day in relation to its plans here.

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Edward Sheldon owns shares in Royal Dutch Shell. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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