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Royal Dutch Shell says oil production has peaked – should I buy shares in the company now?

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Silhouette of an oil rig
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FTSE 100-listed oil producer Royal Dutch Shell (LSE:RDSB) said on Thursday it had reached its peak oil production. From now on, its pumping out of the black gold will slow by 1%–2% each year.

At the same time, the Anglo-Dutch company reaffirmed its commitment to achieving net-zero emissions by 2050. Shell also said it would be accelerating its target of reducing its net carbon intensity by at least 3% by 2022.

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All this is quite a turnaround for a company whose business model has been based on oil and gas production for decades.

Some institutional investors in Shell have been pushing for this move for quite a while, and it appears now the focus for the company is shifting in a more eco-friendly direction.

But what does this mean for the Shell share price? Can this shift away from core business be a success for shareholders as well as the planet?

Slippery slope

Shell has seen its shares lose more than 36% of their value over the last year as falling demand for oil has led to a drop in prices of Brent crude oil.

Oil prices have staged a recovery in the last few months in which a barrel now sits at around $60. However, the damage caused by the drop to as low as $20 in 2020 had a major effect on profits at Shell.

Shell announced last week that profits had hit a 20-year low in 2020, when it made a $21.7bn loss. This is a staggering figure and another reminder of the challenging conditions Shell is operating in.

Those figures clearly prove the need for a shift in Shell’s business. I’m just not sure how easy it will be for the company to pivot towards more green energy sources.

US President Joe Biden has pledged trillions of dollars towards a package aimed at helping the economy shift towards a 100% renewable energy model by 2050.

Shell has a lot of work to do to convince investors that it is not an oil-dependent company. I include myself in that, and that’s why I won’t be buying Shell shares any time soon.

How can the Shell share price climb?

As with any investment, however, there is potential for the value of the company to rise in the coming years. The share price hit its lowest price since the mid-1990s when it fell below 900p in October. Value investors might be encouraged to take a punt that the value will not fall any further.

Despite all the bad news, Shell actually announced a dividend increase last week. It said it will raise the payout by 4% to 17.35 cents per share. It must be noted however that the same dividend was slashed by two-thirds in April 2020.

Shell has traditionally been one of the biggest income stocks on the FTSE 100, and I’m sure management will do whatever they can to keep that reputation. If they can combine this with a real move towards clean energy then the share price could climb again.

I just think there are too many factors playing against the shares at the moment and the outlook is too uncertain, so I’m not a buyer of the stock right now.

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conorcoyle has no position in any of the shares mentioned. 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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