Is Shell’s share price dependent on cutting carbon emissions?

Shell’s share price performance could soon depend on its ability to cut carbon dioxide emissions. A Dutch court has ordered Shell [RDSA.AS] to accelerate planned carbon dioxide emission cuts - a ruling that could set a precedent for other energy majors. The ruling could also have a major impact on Shell’s profitability.

This could see Shell’s share price come under pressure. So far this year, the stock is up 8.3% (as of 28 May’s close). However it has dipped around 1.55% over the past month, and while Shell’s share price is proving resilient to the ruling, however, longer-term investors' view of how traditional oil producers can or cannot fit into a greener future could determine where it heads next.

 

What the ruling means for Shell’s share price

Judge Larisa Alwin ruled that the Anglo-Dutch oil producer would need to cut emissions by 45% by 2030 compared to 2019 levels. The judge said that the ruling would have ‘far-reaching consequences’ for the company. Shell already has some of the more ambitious targets in the industry, having originally aimed to make a 30% cut by 2030, 45% by 2035 and 100% by 2050.

That wasn’t good enough for the court, which said Shell’s climate plans were "not concrete and...full of conditions...that's not enough," according to Reuters. Alwin said that the ruling would require a change in policy from Shell and could  “curb the potential growth of the Shell group”.

"The conclusion of the court is therefore that Shell is in danger of violating its obligation to reduce," judge Alwin said.

The ruling is a big win for the environmental groups, led by Friends of the Earth Netherlands, that brought the case to the court. Shell said it was ‘disappointed’ by the landmark ruling and would appeal the decision.

“There is a valid question about whether this is a watershed moment in the same way the first Big Tobacco legal suits were,” said Nick Stansbury at Legal and General Investment Management, as reported by the Financial Times.

Shell’s share price remained relatively steady on the news, closing last week 4.8% down. However, should it lose an upcoming appeal, then the stock could see volatility.

“There is a valid question about whether this is a watershed moment in the same way the first Big Tobacco legal suits were” - Nick Stansbury at Legal and General Investment Management

 

The impact beyond Shell’s share price

So, is this a watershed moment? The ruling comes as investors, politicians and the general public have been piling on the pressure for energy companies to cut fossil fuel use and increase investment in renewables. And Shell isn’t the only one getting slammed for its climate plans in May.

A similar case brought by local authorities and NGOs is underway in France where Total [Total SE] is being pressured to accelerate its own cuts.

In the US, ExxonMobil [XOM] has been criticised for its energy transition plan, or the lack of one. Recently activist hedge fund Engine Number 1 has snagged two seats on the oil majors board. This is despite the hedge fund owning the equivalent of $50m worth of stock in a company with a $250bn value.

Exxon had tried to persuade shareholders to block the appointments. No luck there as falling profits and worries on how Exxon fits into a greener future came to the fore. The Texas-based oil and gas company is also facing pressure from major investor Blackrock, which is supporting carbon neutrality by 2050.

Over at Chevron [CVX], investors voted to back proposals to cut emissions in the products the company uses, underlining how shareholder action is increasingly becoming a force to be reckoned with. 

 

The oil producers investment theme

Despite growing pressure to reduce carbon intensity, the oil producers investment theme is on something of a winning streak. The theme is up 4.57% over the past month (as of 28 May’s close) and 35.26% over the year as oil demand returns as the worst of the pandemic eases. That’s a better performance than the clean energy investment theme, which has cooled 1.82% over the past month.

  

For now, there could still be upside in the oil sector, although whether this will change in the mid-term remains to be seen. Shell has a €36.37 average price target from analysts tracking the stock on Yahoo Finance, which would see a 130% upside on its current price. Exxon has a $64.16 price target, which would see an almost 9.9% gain and Chevron a $120.2 target, a 15.8% gain.

Yet there’s no escaping the fact that the world is changing and oil and gas producers who don’t make the shift to renewables will get left behind. Over 110 countries have pledged to achieve carbon neutrality by 2050. In the next decade, several major economies have said they will ban new petrol car sales, including the UK. Events like the ruling against Shell in the Netherlands could become commonplace as shareholders demand these companies do their part in hitting these targets.