The oil market has been having a troubling few months. Today, Royal Dutch Shell (LSE: RDSB) followed rival BP in writing-down assets due to lower expected crude prices. With these new expectations in place, is the Shell share price now a bargain?
Do I like the Shell share price?
It is not the answer we like to hear, but I think at this point “yes and no” is the most accurate response to the question. In the past I have been a fan of the company in large part because of its dividend. Unfortunately this is no longer a factor. Looking at the Shell share price however, it may still be a worthwhile investment.
Today the company said it will be writing-down $22bn in assets due to a lowering of its oil and gas price expectations. This follows a similar move by BP earlier this month, with both companies accounting for a bleaker future thanks to coronavirus.
I agree it now seems likely that lower crude prices over the next year will hurt the oil majors. After that though, I am not so sure. To a certain extent, the coronavirus troubles hit at the worst time for crude. The oil market was already weak due to oversupply.
The problems were exacerbated by Covid fears that arguably surpassed the fundamental troubles the market will face. After today’s write-down, as I write this, Shell’s share price stands less than 2% lower on the day. From a low of £9.70 in mid-March, it is still up 37%. The initial fear, it seems, has died down.
Shell said that while it now expects a crude price of $50 a barrel in 2022, its estimates beyond that point remain the same at $60. Admittedly, at £13 a share it is hard to call the Shell share price cheap in this risky environment. That all depends on the future, however.
The green revolution
One major point being cited as a result of recent troubles with oil, is that it may act as a catalyst to quicken efforts towards green energy. Indeed, both Shell and BP have said as much. Both companies already had a commitment to moving towards green energy before this.
This makes sense from a PR point of view, and also from a financial one. If they are truly part of a dying industry, either because of public opinion or oil supply, diversifying is a way to secure their future businesses.
However, as much as people don’t want to hear it, practical renewable energy is still a long way off. To date, none of the alternatives could realistically hope to replace oil and gas globally. Ironically, the oil giants like Shell may be best placed to find alternatives. Historically, companies looking for profit have been far more successful in developing products than those driven by altruism alone.
In the meantime, crude oil will still be king. If supplies do become harder to come by, prices will go up. Companies like Shell could be making more money, not less. I am certainly comfortable holding on to my Shell shares for quite a while yet.
