The Royal Dutch Shell (LSE: RDSB) share price isn’t the power it was. Right now, it stands at 1,286p, well below the 2,841p it hit three years ago. It also trades notably lower than a decade ago, when it stood at 2,122p. Recent underperformance isn’t a blip, but looks like a long-term trend.
Throw in the fact that management recently dropped the dividend for the first time since the Second World War, and Royal Dutch Shell doesn’t look like the sure-fire winner it used to be, and I think its share price will remain under sustained pressure.
For years, Royal Dutch Shell and rival BP were the undisputed FTSE 100 dividend kings. The world ran on oil, and these two were the cornerstone of every UK income portfolio. They still pay generous dividends, although less so in the case of Shell, which currently yields 3.6%, rather than the 5%-6% investors had come to expect.
FTSE 100 oil companies could struggle
Naturally, the pandemic hit the Royal Dutch Shell share price hard. By October last year it had plunged to 866p, a 20-year low. Oil has since recovered to almost $70 a barrel, comfortably past the company’s break-even point of around $50. That’s good news for Shell, but there is bad news elsewhere.
The fight against climate change is likely to inflict further damage on the Royal Dutch Shell share price, following last week’s move by a Hague court to order Shell to halve its carbon emissions by 2030. Shell plans to appeal, but as I argued yesterday, the writing is on the wall for big oil.
Shell has been battling to comply with Paris Agreement demands, but that is now a legal obligation rather than a broad aspiration. The ruling applies to its entire business chain, from suppliers to end consumers. It could also affect investor behaviour. Institutions are already under pressure to comply with ESG demands, and now have another reason to back away. The ruling will further empower activists, who sense blood.
Whatever people’s views on climate change, this should affect their views on the Royal Dutch Shell share price. The truth is that Shell and its rivals were always going to struggle to clean up their operations in the time available to them. Management has been targeting net zero emissions by 2050, and even that looks unrealistic, given that they peaked at a massive 1.7 gigatonnes a year in 2018.
The Royal Dutch Shell share price feels the heat
Technologies such as carbon capture and storage are notoriously expensive. Management has pledged to double its renewable electricity output by 2030, but this will require massive capital investment. Also, barriers to entry are lower for renewables than oil, so competition will be tough. As if that wasn’t enough, Shell has also set itself a target of reducing net debt from $71.3bn to $65bn, and increasing today’s dividend by 4% a year.
The Royal Dutch Shell share price is on a bumpy road. I fear too many investors are looking in the rearview mirror, rather than the road ahead.
Harvey Jones 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.