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Stock Watch: Royal Dutch Shell

Emma-Lou Montgomery

Emma-Lou Montgomery - Fidelity Personal Investing

Oil major Royal Dutch Shell (RDSA) is planning to plant three entire new forests. And it’s not the only corporate to have seized the opportunity to show its green credentials.

Low-cost airline EasyJet, wants to plant trees as part of an offsetting exercise to operate net-zero carbon flights, while towards the end of last year Tesla CEO Elon Musk donated $1 million worth of trees to a YouTuber’s campaign to plant 19 million of them.

Trees undoubtedly play a role in fighting climate change, and there’s no denying that climate change, an issue that dominated so much of 2019, is only going to become an even hotter topic in 2020 and beyond.

There are plenty though, who argue that whatever other steps we take, such as planting more trees, the only real way to stop the planet warming any further is to stop burning fossil fuels altogether.

ClientEarth says adverts from fossil-fuel companies like Shell and BP should come with climate change warnings or be banned. The charity, which takes legal action to protect the environment, argues that the oil majors often present themselves as “part of the climate solution”, but it says their ads should come with a “tobacco-style warning”.

On the plus-side Royal Dutch Shell is leading a group of European companies that are well ahead of their US rivals when it comes to clean energy initiatives. However, while it’s spent an estimated $2 billion on building a low-carbon energy and electricity generation business since setting up its “new energies” division in 2016, progress is slow.

With now less than a year to go, and the sum well below Shell’s own guidance that the total investment between 2016 and the end of 2020 would be between $4 billion and $6 billion, it is only going to raise concerns that oil companies are not moving fast enough to help tackle the climate crisis.

There is no denying that pressure on the likes of Shell is only going to grow. And it poses a very real dilemma for them. And for those who invest in them.

After all, how does a company that generates most of its profits by meeting the world’s - still-robust - demand for oil and gas, navigate the future when the tide is rapidly turning against fossil fuels?

Especially so when as the leading dividend-payer, Shell is relied on by so many retirees and other income investors, who need it to keep the profits coming in and the dividends paid out.

Shell has openly acknowledged that the task at hand is to find “a way to preserve that dividend-paying capacity, while at the same time growing the value of the company, while at the same time also changing the make-up of the company.” And that is no mean feat.

For investors in Shell, profits are key and that was evident when news that it expects impairment charges of up to $2.3 billion in the fourth quarter, and “materially lower” margins in its chemicals business as an impact of a weaker global economy, knocked its share price.

There were no further details given on the impairments, but Shell isn’t alone in this. Chevron and BP have all already written-down billions of dollars’ worth of US shale assets in recent months.

Rising US gas production, much of it a by-product of the shale oil boom, has pushed prices for the fuel to multi-decade lows and with energy companies preparing for a prolonged period of oversupply, that isn’t likely to be a situation that improves any time soon.

Shell has already warned that performance in its liquefied natural gas trading division will not be as strong in the fourth quarter as the prior three months, when stellar results helped partly to offset the impact of lower prices.

Capital expenditure is expected to be near the lower end of the $24 billion to $29 billion range for this year, while production is expected to come in at around 2.8 million barrels of oil a day in the fourth quarter. Shell, which is due to post fourth-quarter results on Thursday also slightly lowered its oil products sales guidance.

Broker Credit Suisse recently repeated its outperform investment rating on Shell and raised its price target from £28 to £29. JP Morgan Cazenove remains overweight on Royal Dutch Shell and has cut its price target by 50 pence to £28.50. HSBC hasn’t shifted its hold position but it has cut its price target to £24.80 and Barclays Capital remains equal weight with a price target of £28.50.

Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Past performance is not a reliable indicator of future returns. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser

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