A Dutch court ruled last week that Royal Dutch Shell (LSE: RDSB) must cut its carbon emissions by 45% by 2030. The ruling is seen as a potential turning point for the oil and gas industry. But this news has had no impact on the Shell share price.
Is the market right to assume that Shell can keep polluting until it decides not to? Or is this the start of disruption that could see Shell’s share price fall back below 1,000p again, as it did in 2020? As a Shell shareholder, I need to decide whether I should think about selling.
I don’t think this news is going to cause the stock to crash immediately. And, in fairness, Shell already has plans to reduce its emissions and is ahead of some rivals.
The problem is that the changes required are ahead of Shell’s own reduction plans, which only specify a reduction of 20% in carbon intensity by 2030.
Carbon intensity means the amount of carbon per unit of energy produced. It’s possible to cut carbon intensity while increasing production of energy. Shell’s targets are much less demanding than the court’s requirement to cut net emissions by 45% by 2030.
Shell plans to appeal the court decision, of course. This case could drag on for years. But if the ruling is eventually enforced, I’d imagine Shell would have to bring forward plans to cut production and sell assets. That could cause a big hit to profits, triggering a slump in Shell’s share price.
Too soon to sell?
What makes this more difficult is that I don’t think Shell’s operations will actually be disrupted for some time yet — possibly not for years. Right now, the company’s performance is recovering well from last year’s crash. Shell’s net debt fell by $4bn during the first quarter and the company generated nearly $8bn of surplus cash in just three months.
Over the year ahead, analysts expect the company’s earnings to return to 2019 levels, while its borrowings continue to fall. The dividend — after last year’s cut — looks very safe to me at current levels, giving a yield of 4%.
Shell share price: my decision
In the short term, I don’t see any real risk to Shell’s business. I think the company will probably do well over the next couple of years.
On a longer view, I think it’s clear the pace of change in the fossil fuel industry is changing. At some point, I reckon oil and gas producers will become like coal miners — no one will want to own them.
We’re not there yet. Shell’s share price stands at around 1,300p, as I write. That prices the stock on around 9 times 2021 forecast earnings, with a 4% dividend yield. That seems affordable enough, but it’s certainly not distressed.
However, when I look ahead, I think the situation is starting to become too uncertain for me. I don’t know if Shell’s share price will fall below 1,000p again like it did last year. But I don’t think the company will be able to provide the kind of steady, reliable growth over many years that I’m looking for.
I haven’t made a final decision, but I’m probably going to sell my Shell shares.
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Roland Head owns shares of Royal Dutch Shell B. 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.