Oil and gas firms are some of the biggest businesses in the world and the biggest dividend-payers, which makes them a naturally tempting consideration for the long-term investor. But there is a fundamental change under way in the sector, which will determine how far into the future the traditional energy companies can survive, and thrive.
This change is the shift towards renewable sources, which are becoming more competitive in fulfilling the world’s energy needs. The winners over time, will likely be companies that successfully transition to becoming clean energy providers.
To this extent, it is worth examining how far Royal Dutch Shell (LSE: RDSB) can pull off the long game. My analysis confirms that it is making progress in its clean energy foray, only adding to its credentials as a strong and stable company.
Preparing for the future
The company’s energy transition strategy clearly says that it aims to “grow our business in areas that will be essential in the energy transition, and where we see growth in demand over the next decade. We expect these will include natural gas, chemicals, electricity, renewable power, and new fuels such as biofuels and hydrogen.”
I like the fact that Shell is putting its money where its mouth is. The company started its ‘new businesses’ in 2016 towards this end. It now has multiple interests around the world in a range of clean energy companies. While it remains to be seen how this aspect of business will develop over time, so far so good.
I also like the fact that Shell has underlined the need to lower costs in order to “profitably produce the oil and gas that the world will need for decades to come, even if prices remain low for a long time.” This is particularly significant as long-term predictions for crude oil prices don’t indicate any windfall-delivering spikes going forward. According to the World Bank, crude oil prices will hover around $70 per barrel up to 2030.
I like that costs haven’t risen out of line with revenue growth in recent years, which confirms that Shell does have a keen eye on costs.
Trading at a discount
From a shorter-term perspective, the company’s results were respectable in the latest quarter. But net earnings did fall slightly, the most likely trigger for a fall in the share price. It dipped to sub-2,500p levels on release day and has remained there ever since. Other short-term concerns, as pointed out by the Motley Fool a few days ago, might also be weighing heavily on investors’ minds. As a result, the share is trading at a discount compared to its peers, with a price-to-earnings ratio of 8.9x compared to 11.8x for BP. But I feel that for the long-term investor, this is a buying opportunity, not a warning sign, as the company remains structurally sound, despite the short-term fluctuations.
Manika Premsingh 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.