The Royal Dutch Shell (LSE: RDSB) share price has declined around 29% over the last 12 months. I reckon much of the decline has to do with the change in hydrocarbon demand. In 2020, oil demand fell sharply as the pandemic curtailed economic activity in many places around the world. Many investors worry the increasing number of electric vehicles will also reduce petrol demand in the future. Given that Royal Dutch Shell depends on hydrocarbons for much of its sales, the RDSB share price hasn’t done very well. It isn’t all bad news, however. The RDSB share price has gained some momentum since October.
Here I weigh the upside and the downside on Royal Dutch Shell, and what I’d do at the present RDS share price.
Optimistic and pessimistic take
Given the current RDSB share price, the optimists think the stock is attractive if Brent oil hovers around $60 per barrel. Considering management has cut a lot of costs last year, many reckon the company could generate fairly substantial free cash flows at that level. With RDSB’s expertise in deep water production, the company could benefit even more if oil prices increase further. To the optimists, the macroeconomic environment also looks more favorable this year than last year. Analysts expect oil demand to increase in 2021 as more places control the pandemic and as economic growth is expected to increase globally.
To many pessimists, though, Royal Dutch Shell looks increasingly outdated given its hydrocarbon business. They think RDSB will have a hard time in the green transition as the company competes against more agile startups. Oil prices could also decline at any time and hurt RDSB’s profits.
The RDSB share price: what I’d do
Although I don’t know where the RDSB share price will go in the next year — because I don’t know where oil prices will go — I’d nevertheless buy and the shares. Long term, I think Royal Dutch Shell, with the right moves and management decisions, can do well even if oil demand decreases.
To me, Royal Dutch Shell has a number of things going for it. The company has a big convenience network that management expects to grow further in the next decade. The company also has a huge natural gas division that can serve as a valuable bridge to green energy. Not only is natural gas cleaner than coal, but it can provide needed power in areas where renewable energy generation isn’t continuous (such as when the wind level falls substantially for areas that depend on wind farms, for example).
Management also has acknowledged the green trend and are trying to adjust to the future changes ahead. They recently gave more details into how they plan to lower carbon intensity in future years and they’re doing deals to help achieve their plan. Royal Dutch Shell recently agreed to acquire electric charging network Ubitricity, for example, to speed up its green transition and hedge against a future where oil isn’t used as much.
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Jay Yao has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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