It’s becoming more and more clear that low carbon is the future for the energy industry.
The green sector is a huge and growing one as the world will need low carbon energy to fight against global warming. The world will also need green energy to continue developing economically.
Royal Dutch Shell (LSE: RDSB) management has taken notice of this huge trend and has adjusted its future plans. With the market having awarded many green energy companies with high valuations, I think there could be upside potential if the company executes correctly.
Here’s how Royal Dutch Shell plans to go green.
How Royal Dutch Shell plans to go green
Royal Dutch Shell has a fairly ambitious goal in terms of going green. In terms of its targets, the company plans to cut the carbon intensity of its energy products by roughly a third by the middle of the next decade. Management also hopes to have a net zero emissions energy business by the middle of this century, if not sooner.
RDSB is planning to invest in a variety of low carbon technologies such as hydrogen, biofuels, and wind power. The company also plans to invest in smart energy storage and electric vehicle charging.
To finance the transition to green from oil and gas, management hopes to use its upstream business as a cash generator.
It also hopes to use liquid natural gas (LNG) as a bridge from oil and coal to renewables. LNG will be useful in many places in terms of patching the intermittency of some renewable energy generation forms. LNG can offer the potential for continuous energy when there isn’t any sunlight for areas that depend on solar, for example.
How RDSB benefits from going green
Going green could help Royal Dutch Shell in many ways.
First, many institutions favor green energy companies and avoid higher carbon generators. If RDSB becomes more green, I reckon it could potentially gain more institutional backing. Having more institutional backing can help with access to capital.
Second, going green will make earnings more sustainable. In the long run that’s important for dividends and capital returns in my view.
Third, the market favors many green stocks right now. If Royal Dutch Shell goes more green, I think there is a chance that the market will perceive it more as a ‘green stock’ and its stock price could rise (if the market continues to like green stocks). If RDSB stock rises, management could potentially use the stock to do more deals to go green faster.
Is the stock a buy?
Although it is a gargantuan task, I am pretty optimistic about Royal Dutch Shell’s ability to go green. Royal Dutch Shell has some advantages in the transition. The company has a lot of financial resources and smart employees to innovate in green energy. Given its existing relationships with many key businesses and millions of customers, the company can also more easily cross sell and market its new energy solutions.
Given its fair valuation and the potential for green innovation, I’d buy and hold Royal Dutch Shell.
Jay Yao 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.