The Royal Dutch Shell (LSE: RDSB) share price has increased substantially since October. However, it is still down nearly 30% over the last 12 months. Royal Dutch Shell depends on oil, natural gas, and oil products for a substantial part of its cash flow. With the meaningful rally in oil prices since October of last year, many in the market expect Royal Dutch Shell to be more profitable, and that’s helped the RDSB share price.
While oil prices are important to Royal Dutch Shell now, I reckon how management does in green energies will be important for the company in the future. Fortunately, Royal Dutch Shell recently gave more details on their green transition strategy. Here’s more on the strategy and what I think it could mean for the RDSB share price.
In terms of its goals, Royal Dutch Shell’s management has certain targets in mind when it comes to reducing net carbon intensity.
Specifically, using the company’s 2016 levels as a baseline, Royal Dutch Shell hopes to cut net carbon intensity by 6%–8% by 2023, a more ambitious 20% by 2030, and 100% by 2050.
In terms of how they plan on getting there, management plans to taper down its oil business over time. In terms of petroleum production, management sees a decline of around 1% to 2% annually.
RDSB hopes to target green markets such as carbon capture and storage, and electric car charging. In terms of carbon capture, one area of particular interest could be nature-based solutions such as reforestation.
With this said, Royal Dutch Shell isn’t investing everything in green energy. Management plans to invest $2bn to $3bn annually in renewable energy assets versus an annual capital expenditure budget of $22bn.
What I think the strategy means for the RDSB share price
Many green stocks have done well over the past year regardless of fundamentals. The optimistic valuations aren’t limited just to small and medium-sized companies in the sector either. Electric vehicle and solar panel maker Tesla, for example, has a huge market cap around the same size as Facebook. If the market remains optimistic on green stocks and Royal Dutch Shell management successfully sells the market that they too are a ‘green stock’, I think there’s a possibility that the RDSB share price could benefit.
With that said, I think it’s going to be difficult for Royal Dutch Shell to change market perception that it’s an oil and gas company right away. Royal Dutch Shell is simply too big in terms of its hydrocarbon business to me. However, giving more details on the green strategy is a step in the right direction, in my view.
In the long run, I don’t know how long the market’s optimism on green stocks will last. Although the valuations might be generous now, they could always change if green stocks fall out of favour.
To me, what matters more to the RDSB share price in the long term is how well management does in terms of delivering sustainable earnings in the renewables sector. With management’s recent description of their strategy, I feel more confident that the company has an achievable plan. I reckon management will execute and as a result, I’d buy and hold RDSB shares.
Jay Yao has no position in any of the shares mentioned. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. The Motley Fool UK owns shares of and has recommended Facebook and Tesla. 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.