Shell plc (SHEL) Ordinary EUR0.07

Shell’s 2024 Energy Transition Strategy update has retained the long-term goal of achieving net-zero emissions across all operations and energy targets.

However, the 2030 target for a reduction in net-carbon intensity now stands at 15-20%, against a previous target of 20%. This is due to Shell moving away from directly supplying renewable power to homes. Shell has also removed its target to reduce net carbon intensity by 45% by 2035.

Shell has also introduced new ambitions to reduce carbon output from customer’s use of its oil products (Scope 3 emissions) by 15-20% by 2030 compared to 2021 levels.

Shareholders will have a non-binding vote on the Energy Transition Strategy at the 2024 AGM.

The shares were trading broadly flat following the announcement.

Our view

With Shell’s oil production set to remain stable through to 2030, oil prices will remain an unpredictable but crucial element of the group’s fortunes. So far in 2024 prices have been moving in the right direction but there’s no guarantee that will continue.

However, Shell's not entirely a one-trick pony. Its Liquified Natural Gas (LNG) trading division performed well this year, helping to offset some of the declines in other areas of the business. With geopolitical tensions remaining high and limited supply coming online in the near term, we think the outlook for this part of Shell's business remains positive.

Over the long term, there are ongoing efforts to future-proof the business through renewables. But like the other parts of the business, its fortunes are largely at the mercy of prevailing energy prices, which lie outside of the group's control. Its earnings are still just a fraction of the group total for now, and recent results have shown just how volatile earnings from these activities can be.

Shell's committed to achieving net zero by 2050 - that means reducing the group's emissions as well as those that come from the products they sell. Shell is particularly well placed to provide lower carbon options to motorists. Its global network of 47,000 service stations is the largest of all the oil majors.

Strong financials enable it to self-fund the significant organic investment required to replace oil reserves and expand and pursue renewable energy and low-carbon fuel initiatives. Shell invests over $20bn each year across its business, with $10bn-$15bn earmarked for low-carbon energy solutions including biofuels, hydrogen, electric vehicle charging and carbon capture solutions between 2023 and 2025. However, with a big chunk of cash flows ringfenced for shareholder returns, there is pressure for cash generation to remain high.

Despite the progress being made in renewables, the oil & gas industry remains uninvestable for certain institutions. There's the potential for this list to grow and that threat could keep a ceiling on the group's valuation. We're not immediately concerned that Shell will end up in the ethical waste bin, but the decision to refocus on fossil fuels has been met with some dismay by environmentalists.

The valuation's recovered over the last year but remains some way below the long-term average suggesting that doubts remain over the longer-term viability of the business model. For now, energy prices and, with them, Shell's current ability to provide returns to shareholders are likely to be the main drivers of sentiment. In our view, that means there's likely to be a lot of ups and downs along the way.

Environmental, social and governance (ESG) risk

Environmental concerns are the primary driver of ESG risk for oil and gas producers, with carbon emissions and waste disposal being the main issues. Health and safety, community relations and ethical governance are also contributors to ESG risk.

According to Sustainalytics, Shell's management of material ESG issues is strong. This reflects a change in its business mix over recent years towards lower carbon fuels such as gas and L&G, and the exit from some of its more controversial assets. Despite Shell's numerous environmental and social targets, the company's impact on the environment and society remains relatively high. The decision to hold oil production steady till the end of the decade is likely to be met with some disappointment.

Controversies relating to environmental degradation, bribery and corruption, and community relations continue to play an important role in how Shell is perceived globally, as well as its financial disclosures around its renewables business.

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