Image source: Olaf Kraak via Shell plc
He Shell (LSE:SHEL) The share price fell briefly this morning after the oil and gas giant lowered some of its green energy targets. This is the first update since the initiative was launched in 2021 and reveals Shell's uncertainty about being able to achieve its original goals.
Initial targets saw Shell commit to reducing the “net carbon intensity” of its products by 20% by 2030 compared to 2016. This target has now been reduced to include any range between 15% and 20%.
At least you held on to that 20% as a “possibility”, but let's be honest: the probability of achieving it now seems low.
It also announced a new target in the same range to reduce emissions caused when customers use its petroleum products by 2030 compared to 2021.
A green path ahead?
The price drop was minor, falling from 2,547p to 2,529p before a slight recovery occurred. Overall, it had little impact on the price, which is still up 4% this week.
In its defense, Shell has maintained its goal of reaching net-zero emissions by 2050. Unsurprisingly, this is driving a significant transformation of its business.
Newly appointed CEO Wael Sawan said “rapid progress in the energy transition” globally has reinforced his “deep conviction in the direction” of Shell’s strategy. The company now plans to stop supplying power directly to European homes and focus on commercial customers and renewable energy.
Part of the strategy includes investing up to $15 billion in low-carbon energy solutions by the end of 2025. This would cover sectors such as renewable energy, electric vehicle charging, biofuels and carbon capture.
So what does this mean for the Shell share price?
I admit, I wasn't expecting big gains when I bought Shell shares a while ago. At the time, it seemed well positioned to effectively transition into the renewable energy narrative. As such, I felt it could provide stability to my portfolio.
However, it has since moved even further away from that goal. And yet the share price has performed better than I expected, up 7.4% since the end of January.
I'm a little hesitant when it comes to climate change and renewable energy. But the fact is that emissions reduction targets exist and tax money is being spent trying to achieve them. Green energy efforts aren't going away, and companies like Shell not only have the funds to help boost them but are under the most pressure to do so.
Despite the recent controversy, I believe Shell may eventually emerge as a potential ally for the green energy sector, whether it likes it or not.
Reduced energy spending means Shell's profit margins have dropped to 6% from 11% last year. As for growth, analysts estimate Shell shares are undervalued by up to 28%. This is reflected in its forward price-to-earnings (P/E) ratio of 8.1 times, which is lower than its peer average of 11.3 times.
Another good metric when evaluating oil and gas stocks is return on capital employed (ROCE). Shell's has increased from -0.6% three years ago to 12.5% today, so it is spending its money well.
Overall, I think the outlook still looks favorable, so I'll hold my stock for now. However, I expect Shell to do more to maintain its green energy goals in the future.
