There comes a time when aging aristocrats must accept that everything must change so that everything can stay the same.
Royal Dutch Shell (NYSE :), (LON :), one of the few majors that has dominated the global energy market in the last century, is increasingly gambling on a completely different company to ensure that it dominates the next century. Although it has been involved in large-scale trade and energy trading for years with services that primarily serve its internal and industrial needs, it is now on the verge of selling electricity to the masses.
The management believes that the company must make that leap if it is to remain relevant in the long term. "The energy system is going to electrify over time and that electricity needs to be generated," said Shell Energy CEO Colin Crooks to Sky News last week when the company launched the UK's First Utility, the first major power supply company the household, baptized.
As a declaration of intent, the rebranding involved the launch of one of the lowest standard rate plans on the UK market, 100% from renewable energy sources. It also offered customers a 3% discount on purchases at its gas stations.
Guessing Game
As with other disrupted industries, one of the biggest challenges is guessing which part of the company will offer the most value in the future: generate? Transmission? Household supply?
Reason is made more difficult by the ongoing pushing and pulling of oil production that keeps wholesale energy prices volatile. Add to this the ability of governments to transfer value from one group of market users to another via legal price ceilings, net rates, environmental taxes and subsidies. It is a lottery: the German RWE (DE 🙂 has estimated an average return of -18% over the past five years, according to Investing.com data. In the meantime, the UK & # 39; s Scottish and Southern Energy (LON 🙂 has achieved an excellent respectable 12.7%.
Shell shares have had a mixed ride. The stock, which reached a record high of $ 73.86 in May 2018 and plummeted only 25% in December, has regained part of its momentum. The ADR traded in the US, which has risen by 13% since the end of 2018, closed on Friday at $ 62.59.
True to its history of both upstream and downstream, Shell is covering its bets. In addition to First Utility, it also bought sonnen, a German maker of residential energy storage units that operates in the same room as Tesla's (NASDAQ 🙂 Power Wall, and two makers of charging solutions, Greenlots and NewMotion, for the growing ranks of drivers. of electric vehicles.
It also, together with a Dutch pension fund, offers Eneco, one of the largest Dutch energy suppliers, and has two large wind farms off the Dutch coast in operation. In total, it wants to invest up to $ 2 billion per year through the "New Energies" division in 2019 and 2020.
That is a tricky figure that gobbles up 8% of the group's capex budget, and a sum that corresponds to more than 12% of last year's dividend. Shareholders, who are only just getting used to getting their quarterly dividends fully in cash again, could easily grumble that the money could be better spent, either on the development of the company's oil and assets or on higher payouts
Strategic benefits
Nevertheless, Shell has three major factors in its favor.
First, the power of his balance and his thorough knowledge of the energy market markets. The company is not going to go bankrupt due to an unexpected turn in wholesale energy prices, as opposed to a dozen competitors of First Utility.
Secondly, renewable energy betting becomes cheaper as technology gets older: it does not fully protect it against volatility in energy policy, but it reduces the need for subsidies to make the figures right, and reduces the risk of Shell repeating his first disastrous flirt with green power (around the same time that BP (NYSE :), (LON 🙂 tried to tell the world it was "Beyond Petroleum"). The tender for the wind farms that it is building together with Eneco stipulates that no subsidy for wind energy may be included in business modeling.
Third, disruption means that there are a number of decent legacy companies nearby that can offer the opportunity to be scalable immediately at relatively low costs.
One company in particular could become an important test for Shell's commitment to its new business. With six times the First Utility customer base and $ 8 billion in annual sales, UK-based supplier Npower, a step-by-step change in the investment budget would be needed – and it would also take patience to run a business that makes money has lost for the last four years.
That is the kind of acquisition that could seriously test the patience of Shell shareholders. But if the big oil and gas extraction is serious – as Crook claims – he & # 39; the largest energy trade in the world & # 39; is, then that is the kind of guess that Shell will sooner or later have to take
