Royal Dutch Shell (LSE:RDSB) shares have been badly affected by the new spike in coronavirus cases. But the oil giant is preparing to cut costs. So, is it a great opportunity or not?
Shell cuts costs
Shell is planning to cut production costs of oil and gas by up to 40%. Sounds like great news, indeed. But there’s a catch, however. Oil companies face rising pressure to become environmentally friendly. That made them set themsleves targets to get carbon neutral. Shell aims to become carbon neutral by 2050, for example. So, as part of this initiative, the corporation simply moved from oil and gas where profit margins are much higher to alternative energy sources. As you can see, it doesn’t mean the company’s total costs will go down. Instead, Shell wants to reduce only the oil and gas costs. At the same time the company is prepared to take on additional higher costs in the area of green energy.
Doesn’t look like particularly good news for the company’s shareholders, in my opinion.
Are Shell shares a good opportunity?
However, what is quite positive for a potential buyer is the fact the company’s stock is trading quite low. Due to the Monday market crash, it’s trading close to its record low, reached this March.
Royal Dutch Shell share price
Source: Google Finance
But let us look at some other fundamentals.
I earnestly believe the oil prices will recover in the medium term. Of course, an economic recession is always accompanied by weak demand for oil and depressed oil prices as a result. But ‘this too shall pass’, in my view. Sooner or later the demand for air and car travel will recover. And I think large players like Shell will be the first to benefit.
What’s more, even the move to green energy might be a source of profits in the long term. Nowadays many alternative energy sources are quite costly and unprofitable. But technological progress has been really fast in the last couple of decades. So, I believe, green energy will become highly profitable one day. It will be very good news for Shell and its stockholders. After a rise in green energy profit margins, Shell shares will go up too, I suppose.
I also like the company’s large scale and dividend yield. There has recently been plenty of hype about the dividend cut. But even after the cut, the dividend yield is still around 5%. That’s well above the Footsie’s average of about 3.6%. As concerns the corporation’s size and financial stability, it’s hard to find a more stable company selling for peanuts. In spite of the coronavirus downturn badly affecting the energy industry, Shell is still enjoying an investment-grade credit rating. The fact that it has a brilliant market position means it will probably be one of the few oil companies to actually gain from the current recession. That’s because its smaller competitors will go bankrupt. As a result, the oil market will get tighter, thus driving oil prices higher. And Shell, in my opinion, will be here to gain.
Here’s what I’d do
It looks like investing in Big Oil is a highly risky step these days. However, patient and brave investors can end up with nice returns, I think. At the same time I wouldn’t invest my entire savings in one industry. But it’s a good addition to a portfolio of stocks, in my opinion.
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Anna Sokolidou 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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