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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Shell Looking Beyond Petroleum

Russia Shell

There are many players looking to enter the oil markets thanks to the raft of deals available as the oil price crash appears to be over. For the oil majors, this will likely mean major opportunities to snap up unconventional producers and assets at low valuations. One “oil” major that may not be participating is Shell. The Anglo-Dutch oil giant is increasingly turning away from its roots in oil and moving towards natural gas as an alternative.

In the year 2000, 37 percent of Shell’s production was from natural gas. By 2015, that number had risen to 49 percent. For ExxonMobil, those figures were 40 percent in 2000 and 43 percent in 2015. For Chevron and BP, the 2000 figures were 27 percent and 40 percent respectively, and for 2015, it was 33 percent and 38 percent. Among oil majors, only ConocoPhillips has seen a comparable shift to gas going form 33 percent to 43 percent gas production between 2000 and 2015.

Shell CEO Ben van Beurden recently told Bloomberg, “We’re more a gas company than an oil company. If you have to place bets, which we have to, I’d rather place them there”. Shell’s pivot towards gas became even clearer earlier this year when the form closed on its takeover of BG Group. That deal gave the company ownership of massive LNG terminals and gas fields around the world. Thanks to organic and external growth over the last decade, Shell now has 20 percent market share in the global LNG market and double the production capacity of ExxonMobil, the world’s largest privately owned (i.e. not state-controlled) oil firm. Related: Oil Slammed After EIA Reports Significant Crude Build

Indeed, one could make a case that Exxon and Shell are increasingly going in different directions. Shell is betting big on natural gas as a bridge fuel to the future, replacing coal power around the world while renewables are still not ready to take on a dominant role. Against that backdrop, it’s hardly surprising that Shell is supportive of efforts to curb climate change, which in turn would reduce the use of coal. By contrast, Exxon has been more measured in its support for such proposals, and more cautious about conclusions regarding the driving forces behind climate change.

Shell appears to be gearing up for a day when oil will no longer be a major fuel source. Beyond the shift to natural gas production, the firm is also forming a renewables investment unit. Over time this division will give Shell greater exposure to upside in renewables like wind and solar. Admittedly, that incremental contribution to the topline will be marginal for a long time to come, but Shell is thinking about a future beyond petroleum.

For investors considering investing in oil majors, the message is clear; not all companies are taking the same track. Oilier companies like Chevron, BP, and Exxon all stand to benefit more if the price of oil continues to rebound. ConocoPhillips and Shell have a more gas-dependent outlook. Both groups could thrive of course – natural gas and oil are not typically directly competitive energy sources – but the investment thesis is different between the groups. Ultimately, that means a different perspective and different growth opportunities.

Oil may have a cyclical rebound ahead, but it’s unlikely that it can take major market share from other fuel sources to dramatically increase demand. Natural gas might have greater secular upside. Either way, investors need to decide where to place their energy bets as the once homogenous group of “oil” majors starts to diverge.

By Michael McDonald of Oilprice.com

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