Shell share price forecast: should you invest in the stock at the end of 2020?
14:56, 5 October 2020
The demand destruction brought by the Covid-19 pandemic has weighed on crude oil prices and, in turn, dragged down oil companies’ share prices. Shares in the UK-Dutch oil and gas producer Royal Dutch Shell have halved since the start of the year and the company is now in the midst of a restructuring programme.
The question on investors’ lips now is: what is the Royal Dutch Shell B share price forecast for the years ahead? Is now the right time to pick up the stock ahead of a recovery in the market, or is it a falling knife?
This Royal Dutch Shell stock analysis looks at the latest company developments and the outlook for the company going forward.
A quick side note before diving into the topic
When looking at a Shell stock forecast, investors should note that Royal Dutch Shell has two share classes listed on the London Stock Exchange. Class A (RDSA) shares have a Dutch source for tax purposes and are subject to a 15 per cent withholding tax on dividends, while Class B (RDSB) shares have a UK source for tax purposes and are not subject to dividend withholding tax.
In this article, we cover the outlook for the Royal Dutch Shell Class B stock.
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The oil industry today: covid-19-driven fall in demand hits profitability
It has been an especially volatile year for the oil market, with overproduction and a price war between Saudi Arabia and Russia followed by a sharp drop in demand during the height of lockdowns to slow the spread of Covid-19. The US benchmark oil price turned negative for the first time in April, hitting companies along the supply chain.
The West Texas Intermediate (WTI) price plunged from $74 per barrel a year ago to -$37.63 on April 20, and the price trend has stabilised in the $30-40 per barrel range since May.
As of the end of August, 36 oil and gas producers had declared bankruptcy in North America alone, along with 37 oilfield services companies, according to law firm Haynes & Boone, which tracks bankruptcies in the energy industry. The low price environment will continue to force exploration and production companies (E&Ps) into bankruptcy, according to projections from the research firm Rystad Energy. “In a scenario with WTI continuing to hover around $40 over the next two years, we can expect another 68 Chapter 11 filings from E&Ps in 2021, and 57 more in 2022.”
The global pandemic has come at a time when energy companies have already been facing increased pressure from governments, investors, activists and consumers to transition to cleaner energy sources. To adjust and transform, the world’s largest oil and gas firms – including Shell – will need to streamline their portfolios significantly to improve cash flow, cost efficiency and competitiveness, Rystad Energy said in a recent study.
Shell could divest assets in several countries, bringing its presence down from 47 countries to just 13 in the coming years, Rystad added. The company has already put some of its assets up for sale, including a key liquefied natural gas (LNG) asset in Indonesia in 2019.
Shell shifts strategy to reduce costs and carbon emissions
The price of Shell’s Class B shares has slumped by more than 58 per cent since the start of the year, from £22.59 to £9.40 on September 30, as the uncertainty surrounding the level of demand in the wake of the pandemic and the impact of the energy transition have unsettled investors. Every $10 per barrel movement in the price of Brent crude oil, the global benchmark, has an impact of $6 billion per year on the company’s cash flow from operations.
In the latest Shell share price news, the company's CEO, Ben van Beurden, said on September 30 that Shell is developing a new strategy to share with investors.
“That mission does mean dramatic change for Shell – and that includes changes to our business plans over time,” Beurden said. “We have to be net zero in all our operations, which means major changes at refineries, chemicals sites, on-shore and offshore production facilities. But it also means that we have to change the type of products that we sell… it will be predominantly low-carbon electricity, low-carbon biofuels, it will be hydrogen and there will be all sorts of other solutions too.
He added: “We have to be a simpler, more streamlined, more competitive organisation that is more nimble and able to respond to customers. Reducing cost is essential.”
Shell will refocus its business units so that its upstream E&P segment will be run to ensure strong cash flow to invest in the lower-carbon products. It will streamline its refining business, selling off sites and integrating those it keeps with its chemicals business. Its integrated gas business will have a bigger focus on growing in new markets and the company will “create new business models, new markets, new customers for the low-carbon products we want to sell,” Beurden said.
Shell expects to cut 7,000-9,000 jobs by the end of 2022 as part of the restructuring, for an annual cost saving of between $2-2.5bn, Beurden said.
In an update on September 30 to its third-quarter 2020 outlook issued in July, the company said that it expects its combined oil and gas production to be 2.97-3.11 million barrels of oil equivalent (boe) per day. That is down from its previous forecast of up to 3.28 million. The company also said it will take an impairment charge of $1-1.5bn for the third quarter in response to the fall in oil and gas prices.
Shell share price forecast: can the stock rebound?
Analyst consensus for the RDSB share price forecast trends towards the stock is moving higher. Of the 20 analysts that have issued 12-month price targets for the stock, the median target is £15.25, with a high estimate of £31.00 and a low of £10.50, suggesting a 62 per cent increase in the share price, according to Financial Times data.
Swiss bank UBS (UBSG) on September 28 set a price target for the stock of £17.50 and a “buy” rating, while on September 30, Credit Suisse (CS) reiterated its “buy” rating with a target of £15.50 per share.
Shell’s stock would benefit from a rebound in crude oil prices, which analysts at TD Securities expect over the longer term. “While in the near term, demand uncertainty may be particularly elevated, as we look further into the horizon, the balance of risks is tilted towards the right-side tail as a continued economic normalisation and potential vaccine announcement in the months ahead offer a possibility of an upside surprise for demand.”
An effective restructuring and higher oil prices are essential for Shell, as on its current path the stock is set to continue declining according to WalletInvestor. Its Shell share price prediction has the stock halving again to £4.71 per share based on its current trajectory.
What is your view: are Royal Dutch Shell shares – a buy or sell?
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