Royal Dutch Shell: Talking The Talk, But Walking The Walk?

There is massive change happening in the transition from fossil fuels to renewable energy in the power and transport industries. While the major oil and gas companies have acknowledged the change, apart from Total (NYSE:TOT) there is little indication that other oil companies Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX) or BP (NYSE:BP) have concrete plans to change quickly. Here I consider whether Royal Dutch Shell (NYSE:RDS.A)(NYSE:RDS.B) is getting serious about the change.

All of the oil and gas majors are under pressure, but Shell is particularly challenged as its debt has blown out due the acquisition of BG Group for $50 billion. A key part of the next steps involves debt reduction through divestment. The BG investment could prove problematic as the world is awash with new LNG projects coming on stream. For the last 3 quarters it could pay its high dividend (6.9%) from free cash flow, but this was in an environment where the Brent price was $54/barrel. This can’t continue if the oil price stays where it is now. So it is a pretty challenging time for Shell.

The context for change

There are lots of reasons why strategists in the oil and gas majors might be thinking about the pace of change and when/if to participate. The oil industry is challenged with major expansion of US oil being fueled by substantial investment from Wall Street in unprofitable shale oil developments in the US. This will probably end in tears, and in the meantime the oil price is in decline, with Brent crude at $46.78 today.

The G20 has just ended in Germany with a resounding statement from 19 members of the G20 that the Paris Agreement will be implemented. President Trump is a lonely figure seeking to marginalize the Paris accord, but the rest of the US looks likely to achieve the US Paris targets anyway. Paris is about the end of net greenhouse gas emissions by 2050. This essentially means the end of burning fossil fuels by 2050.

The electrification of transport now seems not only unstoppable, but also dramatically accelerated, with the announcement last week that from 2019 all Volvo cars will have an electrified component and the first of the BEV (Battery Electric Vehicle) models to be introduced in 2019. This month Tesla releases its much-heralded Model 3.

All of the above points in one direction, that the age of fossil fuels is beginning to end. The business plans of Exxon Mobil, Chevron and BP show no sign that they think this change will happen for several decades and so they continue to have oil and gas at the center of their business developments.

Shell has begun to look like it might break ranks and here I discuss two recent signs of a change in thinking and planning.

Shell CEO Ben van Beurden spoke yesterday at the World Petroleum Congress in Istanbul. While the core of Shell the oil and gas company shone through, van Beurden indicated that Shell is on board for the big challenges that confront the world. The key is the Paris Agreement with a goal to keep global temperature rise to less than 2C (and hence effective decarbonization by 2050). He was clear that Shell is willing to take its part in achieving this goal, although how that can be married with a big commitment to gas was not obvious. He made the point that while Asia will continue to grow rapidly, the massive changes will occur in Africa. He indicated that this needs to be a core perception in planning for a future world that does not exceed 2C rise. His view was that coal is not going to be a part of this future, but he does see a role for gas, which is hard to reconcile with the Paris goals.

Van Beurden mentioned the Taskforce on Climate-related Financial Disclosures as a key development to which Shell recently signed up (see below). He also talked about pricing carbon as a possible way that carbon capture might become feasible.

Like much of the big oil and gas rhetoric, the presentation was strong on concept and a bit light on reality, although he did indicate that Shell’s New Energies division would be investing (up to) $1 billion/year at the end of the decade.

Shell to acquire MP2 Energy

Acquisitions can accelerate company reorientation. Through its Shell Energy North America (SENA) division, which is part of global Shell Trading network, Shell plans to acquire (in this quarter) Texas renewable energy and energy management company MP2 Energy. SENA manages a successful retail energy business, which is focused on large commercial and industrial clients.

SENA is focused on marketing gas and wholesale power, along with environmental and risk management offerings. Its retail energy business is focused on the West Coast of the U.S. Acquisition of MP2 Energy will extend this footprint in commercial and industrial segments to Texas and Eastern US.

MP2 Energy has the kind of platform from which Shell might launch a major push in the low carbon space. It manages a diverse mix of low carbon assets, including 550 MW of wind, 30 MW solar PV farms and 40 MW distributed solar PV in Texas through a partnership with Tesla (NASDAQ:TSLA) subsidiary SolarCity. MP2 Energy is also a major demand response provider (~550 MW) to ERCOT and it has technology to assist retail commercial and industrial customers manage and reduce their energy use.

Context of the MP2 Energy acquisition

While the oil and gas majors have largely ignored the renewable energy sector, with 70% of new power build being renewables last year, and attractive pricing for solar and wind developments, it is clearly time to consider entering the space. CEO van Beurden makes clear that Shell is taking this seriously and the MP2 Energy acquisition is a start. The question is as to whether it is enough.

Shell, through Shell Technology Ventures, has made other investments in customer-focused energy management. These include co-investing with Energy Impact Partners (which invests in optimizing energy consumption and renewable energy, and has Southern Company (NYSE:SO), National Grid (NYSE:NGG), Xcel Energy (NYSE:XEL), Ameren (NYSE:AEE) and Great Plains Energy (NYSE:GXP) as key partners). A recent investment was in Sense Labs, Inc., which provides home energy information management.

Shell is also reportedly building a solar team to develop international and corporate solar projects.

These are all early steps, but are not consequential for a major oil and gas company that is investing $25 billion in oil and gas exploration and exploitation in 2017. There is a lot about “positioning the company for growth as the world transitions to a low-carbon energy system,” but little (yet) about how it is going to get there.

Task Force on Climate Related Financial Disclosures

Shell is the only oil and gas major to endorse the report to the G20 on climate related financial disclosure.

Shell CEO Ben van Beurden commented on the report just released as follows:

I agree that companies should be clear about how they plan to be resilient in the face of climate change and energy transition. I believe it is right that it should be transparent which companies are truly on firm foundations over the long-term. I applaud the task force for its work to achieve this aim and I have signed a letter confirming Shell’s support for the initiative. The details matter and I look forward to Shell working with the task force on those details. Specifically, how we present forward-looking information in an uncertain world, the disclosure of commercially sensitive data and the feasibility of providing the suggested detail to the standard required of financial filings. Ultimately, however, both Shell and the task force want these disclosures to be fit for purpose.

This is an important area, as investors need information to be able to decide which companies to invest in. Shell is at the table and helping to shape the nature of information collected, while the other oil and gas majors are on the sideline. This might indicate that Shell wants a part in the process, while the other oil and gas majors think that they can get away without disclosure.

Conclusion

It is a challenging time to be an oil and gas major. In two areas Shell has recently indicated a level of seriousness about reorienting its business to begin to align with the Paris Agreement and the need to begin the process of decarbonizing. However the efforts are small change compared with its major investment in purchasing BG and committing to a gas future. A close look at how Shell presents its business going forward reveals that it is still about fossil fuels.

I think it is too early to know if Shell will reshape its business. However, given that Shell may invest up to $1 billion/year in low carbon developments within the next 3 years, there is room to see some serious commitment. I remain cautious about Shell’s intentions without further evidence of a substantial low carbon strategy.

I am not a financial analyst but I am focused on the changes in energy and transport as the world begins to decarbonize. If my commentary helps shape your energy and transport investment analysis, please consider following me.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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