Oil major Royal Dutch Shell (LSE:RDSB) has been responding to the oil downturn by pivoting into renewables. One area it excels in is liquified natural gas (LNG), a more environmentally-friendly option than oil or coal. But can Shell’s interest in renewables be as profitable to shareholders as oil once was?
The Royal Dutch Shell share price is down 17% in a year, but up 10%+ in the past month on a higher oil price. Shell has had to take on an unprecedented level of debt in the past year to cope with the Covid-19 downturn, but it’s maintaining a dividend that offers a 3% yield at today’s share price.
Royal Dutch Shell LNG investment
During the last decade, Shell has increased its share of global LNG volumes sold from around 8% to over 20% in 2020. It’s now supplying LNG to 37 countries in the world and this is growing. Its target is to reach 3 million tonnes per year of new LNG markets by 2025.
Shell’s recently opened LNG regasification terminal in Gibraltar is reducing CO2 emissions and improving air quality in the region.
In shipping, Shell is also helping its customers reduce their CO2 emissions too. For instance, its client BHP has signed a deal with shell for LNG as fuel for five ships, reducing CO2 shipping emissions by 30%.
Risk in expiring contracts
Not that it’s all rosy. In recent years, the oil and gas industry has been experiencing a general slowdown in natural gas investments. That’s because there’s been considerable oversupply, along with a reduction in investment in upstream gas supply and LNG plants. Shell says it hasn’t directly experienced any LNG slowdown, but Covid-19 shutdowns are affecting its bottom line and causing project delays.
Several LNG sales contracts will expire in the coming years, and it needs these to renew or be replaced if it’s to keep up with targets. That’s especially so if it’s going to achieve 100 million tonnes by 2030, which would be in line with market growth.
It has already begun making investments to boost volumes. These include recent LNG processing units in Nigeria and Canada.
In a recent analyst Q&A, Maarten Wetselaar, Shell’s IG and Renewables Director, said that cash flow projections only include confirmed business deals and not contract extensions based on hope. I think that should be a given, but it’s reassuring to hear.
Shell is investing in renewables
Shell is integrating its business so that its renewables arm includes LNG, hydrogen, and carbon capture. These are all lucrative green energy sectors in which it could prove a winner, if it stays ahead of the game.
According to a September McKinsey report, the LNG industry is oversupplied but could grow through diversifying into areas such as decarbonisation. This gives an extra glimmer of hope to Shell’s plans. Gas is a favourable option in heavy industries such as construction, iron and steel. They don’t transition easily to electricity, so gas is the next best thing.
A period of transition for any business poses a risk to shareholders and for the time being, Shell remains reliant on an oil price ideally north of $45. But I’m bullish on both oil and renewables. Therefore, I’d happily buy shares in Shell today.
