Fuel prices have been in the spotlight recently as panic buying has led to shortages at the pumps. This is part of a wider increase in demand for oil as world economies open up, which has helped to boost revenues for major oil companies. This has resulted in a 15% increase in the share price of Shell (LSE: RDSB) in a month; meanwhile, it has risen over 80% in the past year.
Green shoots
Shell has hiked its dividend for the past two quarters, owing to stronger revenues and a return to profitability. It posted a profit of $3.4 billion on revenues of $60.5 billion for Q2 2021, which is impressive, given that global demand for oil is still projected to be below 2019 levels for 2021. Shell is also focusing on improving its environmental credentials by investing into technologies such as carbon capture and storage (CCS) and clean hydrogen. The latter of the two it plans to maintain its position as a world leader and expand its footprint substantially, by installing new hydrogen fuelling stations across its retail network.
Shell remains overwhelmingly an oil and gas company though, and almost all of its cash generation comes from the production and refining of crude oil. This carries less of a stigma for many investors at the moment as gas prices in the UK have skyrocketed, showcasing the global need for fossil fuels even with extensive government support for renewable energy. Even for those who are less convinced about the future of oil and gas, the company’s push to move towards hydrogen and lower-carbon alternatives offers the potential for longer-term growth.
An opportunity not to be missed?
Although Shell’s CEO remains (unsurprisingly) confident about the company’s push towards net-zero, questions still remain. For example, how profitable will it be during this transitory phase? With a forward-looking price-to-earnings (P/E) ratio of close to 10, Shell’s share price may be cheap looking forwards, but it is uncertain whether oil and gas will remain close to their current high prices or fall, which would harm Shell’s earnings significantly.
Although the immediate outlook for Shell is positive, I can’t help but feel that a combination of tighter environmental regulation, increased costs and the uncertainty surrounding the global economy and energy transition leave the company vulnerable in the long term. Its dividend yield is also lower than that of its closest FTSE 100 competitor, BP. If Shell does manage to capitalise on the current oil price and successfully invest in the future, then it may become attractive to many investors, but uncertainty still looms overhead.
With all this in mind, I wouldn’t add Shell to my portfolio because I prefer to seek longer-term security, rather than an immediate reward.
