Breaking News
Ad-Free Version. Upgrade your experience. Save up to 40% More details

Shell's Green Power Gambit; Next Major Pivot For Big Oil Aristocrat?

By (Geoffrey Smith/ )Stock MarketsApr 01, 2019 02:26AM ET
Shell's Green Power Gambit; Next Major Pivot For Big Oil Aristocrat?
By (Geoffrey Smith/ )   |  Apr 01, 2019 02:26AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items

There comes a time when ageing aristocrats have to accept that everything must change so that everything can remain the same.

One of a handful of oil majors that dominated the global energy market over the last century, Royal Dutch Shell (NYSE:RDSa), (LON:RDSa) is betting more and more heavily on a very different business to ensure it can dominate the next one too. While it has had a sizeable power trading and supply business for years, servicing mainly its internal needs and those of industry, it’s now on the verge of selling electricity to the masses too.

Management believes it has to take that leap if the company is to stay relevant in the long term. “The energy system is going to electrify over time and that electricity needs to be renewable,” Shell Energy chief executive Colin Crooks told Sky News last week, as the company rebranded U.K-based First Utility, its initial big venture into household power supply.

As a declaration of intent, the rebranding included the launch of one of the lowest basic tariff plans on the U.K. market, 100% sourced from renewables. It also offered customers a 3% discount on purchases at its gas stations.

Guessing Game

As with other industries under disruption, one of the biggest challenges is guessing which part of the business will provide the most value in future: generation? Transmission? Household supply?

Guessing is made trickier by the ongoing oil production push and pull that's keeping wholesale energy prices volatile. Add to that the ability of governments to transfer value from one group of market users to another via regulatory price caps, grid fees, environmental taxes and subsidies. It’s a lottery: Germany’s RWE (DE:RWEG) has averaged a return on equity of -18% over the last five years, according to data compiled by Meanwhile, the U.K's Scottish and Southern Energy (LON:SSE) has managed an eminently respectable 12.7%.

RDSa Weekly 2016-2019
RDSa Weekly 2016-2019

Shell's shares have had a mixed ride. The stock, which hit a high of $73.86 in May 2018 only to plummet 25% by December, has regained some of its momentum. Its U.S. traded ADR, which are up 13% since the end of 2018, closed Friday at $62.59.

True to its history of operating upstream as well as downstream, Shell is hedging its bets. In addition to First Utility,this year it also bought sonnen, a German maker of residential power storage units that operates in the same space as Tesla’s (NASDAQ:TSLA) Power Wall, and two makers of charging solutions, Greenlots and NewMotion, to serve the growing ranks of electric vehicle drivers.

It’s also bidding, together with a Dutch pension fund, for Eneco, one of the biggest Dutch power suppliers, and is commissioning two big wind parks off the Dutch coast. In all, it aims to invest up to $2 billion a year through its “New Energies” division during 2019 and 2020.

That’s an awkward number, consuming up to 8% of the group capex budget, and a sum equivalent to over 12% of last year’s dividend. Shareholders, who have only just gotten used to getting their quarterly dividends fully paid in cash again, could easily grumble that the money could be spent better—either on developing the company's oil and gas assets, or on higher payouts.

Strategic Advantages

Nonetheless, Shell has three big factors in its favor.

First is the strength of its balance sheet and its profound knowledge of the energy commodity markets. The company is not going to be forced out of business by some unexpected turn in wholesale energy prices, unlike a dozen of First Utility's competitors.

Second, bets on renewable power are getting cheaper as the technology matures: that doesn’t completely protect it from volatility in energy policy, but it does lessen the need for subsidies to make the numbers add up, and reduces the risk of Shell repeating its first disastrous flirtation with green power (around the same time that BP (NYSE:BP), (LON:BP) was trying to tell the world it was “Beyond Petroleum”). The tender for the wind farms it’s building together with Eneco specifies that no subsidy for wind power should be included in the business modelling.

Thirdly, disruption means that there are some decent-sized legacy businesses around that could offer the chance for instant scale at relatively low cost.

One company in particular could become a key test of Shell’s commitment to its new business line. With six times the customer base of First Utility and $8 billion in annual revenue, U.K.-based supplier Npower, would require a step change in the investment budget—and it would also require the patience to turn around a business that has lost money for the last four years.

That is the kind of acquisition that could seriously test the patience of Shell’s shareholders. But if the oil and gas major is serious—as Crooks claims—about being “the biggest power business globally,” then it’s the kind of gamble Shell will have to take sooner or later.

Shell's Green Power Gambit; Next Major Pivot For Big Oil Aristocrat?

Related Articles

Shell's Green Power Gambit; Next Major Pivot For Big Oil Aristocrat?

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
Sign up with Email