After falling around 40% since the end of 2019, the Shell (LSE: RDSB) share price looks cheap. However, while I think the stock appears cheap compared to history, I think the business is facing some severe challenges. As such, I would avoid Shell and buy BP (LSE: BP) shares instead. I believe the latter has a much brighter long-term outlook.
Shell share price challenges
Over the past 12 months, Shell has faced some huge hurdles. As well as the pandemic, the company has had to develop a plan to deal with the climate crisis.
There’s a concerted effort by consumers and companies worldwide to move away from dirty hydrocarbon fuels towards renewable energy. Big Oil corporations like Shell and BP need to adapt with the times or be left behind.
While the company is pushing ahead with its plans to develop the business for the future, investors want more. The Shell share price has continued to languish despite management’s efforts.
I can see why. By 2030 Shell aims to double the electricity it sells, delivering the equivalent of more than 50m households with renewable electricity. It also wants to achieve net-zero emissions by 2050.
I think this falls far short of BP’s ambitions. This company is planning to cut its oil and gas output by 40% by 2030. It is looking to increase renewable energy production to 50GW by 2030, up from the 2.5GW it has today. That’s a 20-fold increase.
I think these numbers imply the Shell share price will continue to underperform BP shares as we advance. A falling oil price and rising production costs suggest oil and gas profit margins will shrink over the next few years. Meanwhile, increasing demand for renewable energy could lead to higher profits from renewables output.
Time to buy BP shares?
There’s no guarantee BP shares will benefit significantly from its decision to invest more in renewable energy. It seems to be the right thing to do today, but the environment could change quickly.
The world is still consuming a tremendous amount of oil and gas every year, and some analysts believe that falling spending in the sector could push oil prices significantly higher in the near term. This would be hugely positive for the Shell share price, and it may leave BP in the lurch as the company chases expensive renewable energy projects. Still, BP is not abandoning oil and gas entirely, not yet anyway.
The most considerable uncertainty facing both of these businesses is the oil price.
The price of oil is highly unpredictable. It can rise or fall as much as 5% in a single day. This makes it very difficult to predict the future for oil and gas investments, such as BP shares and the Shell share price.
Still, considering the enormous worldwide shift towards renewable energy, I would buy BP shares for my portfolio today and avoid Shell. This is based on BP’s commitment to spend more on renewable energy over the next few decades.
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Rupert Hargreaves 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.