The Motley Fool

Should You Sell Royal Dutch Shell Plc And Buy AFC Energy plc?

Shares in hydrogen fuel cell developer AFC Energy (LSE: AFC) have surged by 82% this week after the company released two pieces of significant news flow.

The first is that AFC has signed an agreement with two South Korean companies to deploy an initial 50MW of generation capacity at Daesan in South Korea. The joint venture is expected to deliver sales of over $1bn during the next ten years, with AFC set to hold a 40% stake in the joint venture alongside Samyoung Corporation and Changshin Chemical Co. With the first of two phases set to be operational by the end of next year, the medium-term outlook for the company has suddenly improved substantially.

The second piece of positive news flow is that AFC has made a breakthrough with its new alkaline fuel cell system. It has designed a 101-cell stack cartridge, which has improved the performance of its fuel cells that are being used by Air Products in Germany. In fact, the successful operation of AFC’s first manufactured 101 fuel cell stack affirms delivery of the fourth key milestone in the 2015 Power-Up programme and puts the company in an even stronger position regarding its commercialisation strategy.

A New Era?

Clearly, news flow for AFC has been positive of late. However, its shares are still down 55% in the last year and, while hydrogen fuel cells could prove to be part of a long-term future where less reliance is placed upon fossil fuels, oil stocks such as Shell (LSE: RDSB) (NYSE: RDS-B.US) still have considerable merits, too.

For example, Shell offers a stability that a small company such as AFC simply cannot match and, while its news flow is unlikely to cause a shift in its share price of 82% in just four days, its rationalisation plan to sell off non-core assets could lead to improving investor sentiment over the medium to long term. And, with Shell having a forward price to earnings (P/E) ratio of just 11.6 and a yield of 5.9%, it seems to offer excellent value for money and top notch income prospects at the present time.

Looking Ahead

With AFC being a loss-making entity, it is likely to require further capital raisings over the medium to long term. As such, it will probably be reliant upon further positive news flow and technological breakthroughs so as to push its share price higher. However, with this week’s deal set to generate a significant amount of revenue, its long term future appears to be relatively bright. Furthermore, with energy consumption becoming more focused on greener sources, it could be part of a fast-growing niche. As such, while risky, it could be worth buying at the present time.

However, that’s not to say that you should sell Shell in favour of AFC. Fossil fuels may be seeing demand wane, but Shell remains a highly profitable business that offers stability, a great income, and excellent value for money at the present time. Therefore, a mix of Shell and AFC could prove to be the winning combination in the long run.

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Peter Stephens owns shares of Royal Dutch Shell. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.