Shell (LSE: RDSB) shares have fallen out of favour with investors recently.
There are a handful of reasons why investor sentiment towards the business has deteriorated in recent months.
First of all, the falling oil price has hit the group’s profits, which forced management to slash the company’s dividend to investors earlier this year.
On top of this, the company is facing increasing pressure from green groups to decarbonise its operations.
Shell, as a Big Oil business, is one of the world’s largest individual polluters. Activists want the company to take a more aggressive stance to reduce its impact on the planet.
Cities and governments around the world are also stepping up their efforts to fight climate change. These changes will hurt Shell shares.
However, despite the headwinds facing the business, I’m optimistic about Shell’s long-term potential. Today I’m going to explain why.
Shell shares for the long term
The oil group is at a crossroads. The world is moving away from dirty hydrocarbons towards cleaner fuels. And this trend is accelerating.
Renewable energy is rapidly replacing coal and gas as fuels in the electricity network. Meanwhile, airlines are experimenting with biofuels, and planes are becoming more efficient at burning traditional fuel. The world is also waging war on single-use plastics.
All of these efforts are having an impact on global oil demand. Demand is expected to fall by around 10% this year. Although it will rebound modestly in 2021, according to current projections, it’s expected to plateau and decline steadily from there on.
This suggests Shell has to adapt or risk being left behind. That’s precisely what the company is doing. It’s investing billions of dollars in renewable energy projects, and the group is working towards becoming a global electricity supplier.
This is a sustainable path for the business, in my opinion. Global electricity demand is only increasing, and there are no genuinely global electricity companies. Shell could become the first.
This would be a considerable competitive advantage for the business, which is already one of the world’s biggest energy traders.
The bottom line
Shell has a history of changing with the times, and this latest pivot leads me to believe that Shell shares could be an excellent long-term investment.
Investors will be paid to wait for the transition. Even after the recent dividend cut, the stock currently supports a dividend yield of 5.8%. That’s compared to the market average of 3.6%.
What’s more, after recent declines, Shell shares are trading at one of their lowest levels in two decades. This implies that the stock offers a wide margin of safety at current levels.
As such, I reckon now could be an excellent time to buy shares in this energy giant, while they trade at a low level. Investors could see large total returns as the business transition towards an electricity giant.
Rupert Hargreaves owns shares in Royal Dutch Shell. 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.