All around the world, oil and gas shortages are causing some serious headaches. Oil and gas companies are struggling to meet the increase in demand following the reopening of western economies. This has pushed the share prices of both Royal Dutch Shell (LSE: RDSB) and BP (LSE: BP) up over recent months and resulted in a massive influx of capital for both companies. But I fear that this share price surge will be short-lived. Here’s why I think the shares would be bad additions to my portfolio.
Despite reduced demand, Shell made over $200bn in revenue in the last 12 months. The Anglo-Dutch company recently announced a $2bn share buyback and made a commitment to invest further in the production of hydrogen fuel and carbon capture technology.
Personally, I’m a big believer in the future of hydrogen. But Shell is producing blue hydrogen, which is made by extracting the hydrogen from natural gas. This is a carbon-heavy process that needs expensive carbon capture facilities to make it viable.
The share buyback also worries me. It’s good for shareholders in the short term, but doesn’t bode well for the future. Prices will fall as the oil and gas shortage ends. Carbon taxes are also certainly going to be implemented at some point in the future. To me, Shell doesn’t seem to be taking the need to change its business seriously enough.
Last year, BP announced a commitment to reduce its oil and gas production by 40%. It plans to do this by investing directly in wind and solar power. In the meantime, BP has also committed to producing more blue hydrogen and developing carbon capture technology. Blue hydrogen makes sense for BP. It has already has invested several billions of dollars into the infrastructure to find, extract, and refine natural gas from its wells around the world. But this shortfall still needs carbon capture technology to catch up if it’s going to be effective. BP has also benefited greatly from the oil and gas shortage, bringing in more than $7bn in the first half of 2021. Unfortunately, this seems to have gone to its head. It has also announced a stock buyback in the region of $1.4bn.
The oil and gas shortage will eventually subside and the COP26 climate summit is less than a month away. US Climate Envoy John Kerry believes that the world is ready to tackle climate change and we can expect some sweeping changes.
Both BP and Shell have managed to build investor confidence by promising to develop low-carbon technologies. But neither of them seems willing to utilise the cash brought in by the gas shortage to achieve this. I think this will harm both companies in the long term, and I won’t be adding either to my portfolio.
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James Reynolds does not have a 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.