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What next for Shell’s share price after Dutch court ruling?

Royal Dutch Shell’s [RDSA] share price has recovered from an initial slide following a court order from The Hague ruling that the Anglo-Dutch company must cut its carbon emissions by 45% compared with 2019 levels before 2030.

In response, CEO Ben van Beurden said this means an acceleration rather than a drastic change to Shell’s decarbonisation plans, but is the newly enforced target feasible, and what is its potential impact on Shell’s share price?

Looking at the recent performance across the wider oil sector, the Oil Producers theme rebounded 2.29% on Monday 14 June to take top spot on our performance screener, before dipping to second place at 15 June’s close. It is currently up 1.24% for the week and 37.44% for the year.

 

How has Shell’s share price reacted?

Shell’s share price dropped 2.38% in the two days following the Dutch court’s ruling on 26 May, to 1,345.60p, but has since rebounded by more than 10% (to 15 June’s close).

Across the last 12 months, Shell’s share price has climbed 7.9% overall, jumping 69% from last October’s 20-year low at 878.10p, as a second wave of COVID-19 prompted further lockdowns and oil prices continued to suffer. That said, Shell’s share price lies 6.58% below its 1 February 52-week high of 1,598.15p (as of 15 June’s close).

 

What was the Dutch court’s ruling?

In a case brought by climate campaigners, including the Dutch arm of Friends of the Earth, the district court in The Hague ruled that Shell must cut net carbon emissions across its entire global business by 45% by 2030, compared with 2019 levels.

In response, Shell acknowledged that “urgent action is needed on climate change” and pointed to the fact it’s already investing billions of dollars in low-carbon energy. They also said they “will continue to focus on these efforts and fully expect to appeal today’s disappointing court decision.”

45%

Amount Shell must cut net carbon emissions by 2030

  

Despite the inevitable appeal, van Beurden said the court’s decision “applies immediately and should not be suspended pending an appeal”, and that the company would fast-track its energy transition plan, as reported by the Financial Times.

Judge Larisa Alwin, who said there would be “far-reaching consequences”, ruled that Shell’s existing climate strategy was not concrete enough and that the company had a human rights obligation to take action. Shell had planned to cut the carbon intensity of the fossil fuels it produces and sells by 6% by 2023, 20% by 2030 and 45% by 2035, compared with 2016 levels, as part of its goal to achieve net zero emissions by 2050.

 

Can Shell meet tougher targets?

While Van Beurden said he was “disappointed” that Shell was “singled out” by a ruling he believes has minimal effect on global carbon dioxide emissions, he said Shell will “rise to the challenge” to cut greenhouse gas emissions, by “taking some bold but measured steps over the coming years”. In a LinkedIn post, van Beurden said: “For Shell, this ruling does not mean a change but rather an acceleration of our strategy.”

“For Shell, this ruling does not mean a change but rather an acceleration of our strategy” - Shell CEO Ben van Beurden

 

Despite the positive rhetoric, there is no doubt that Shell faces a huge challenge to meet these newly imposed targets. Indeed, “Shell and its rivals were always going to struggle to clean up their operations” to meet its previous targets, according to finance journalist Harvey Jones, writing in the Motley Fool recently.

Jones reckons reaching net zero emissions by 2050 “looks unrealistic”. Additionally, technologies like carbon capture and storage are “notoriously expensive”, and doubling its renewable electricity output by 2030 means massive capital investment. Shell also has a target of reducing net debt from $71.3bn to $65bn, while simultaneously increasing its dividend by 4% a year.

 

Shell to continue producing fossil fuels

Shell says that targeting energy producers without changing consumption habits is pointless in the battle to tackle climate change, and the firm is open regarding its plans to continue producing fossil fuels, which generate the bulk of its current revenue.

“For a long time to come, we expect to continue providing energy in the form of oil and gas products both to meet customer demand, and to maintain a financially strong company,” said van Beurden.

“For a long time to come, we expect to continue providing energy in the form of oil and gas products both to meet customer demand, and to maintain a financially strong company” - Ben van Beurden

 

While the majority of Shell’s investors supported its existing energy transition plan at Shell’s annual shareholder meeting last month, many are seeking more ambitious targets, according to an FT report.

 

What is the outlook for Shell’s share price?

With oil prices recovering from pandemic lows, rising over $70 a barrel as Brent crude oil hit a two-year high on Monday 14 June, they are now well past Shell’s break-even point of circa $50.

However, the global movement to combat climate change could affect investor behaviour and “inflict further damage on the Shell share price”, according to Jones. He added that “institutions are already under pressure to comply with environmental, social and governance (ESG) demands, and now have another reason to back away”, while “the ruling is also likely to empower activists.”

Shell will now “seek ways to reduce emissions even further in a way that remains purposeful and profitable” and plans to boost spending on renewables and low carbon technologies to up to 25% of its overall budget by 2025, reports Reuters.

With analysts saying Shell faces a 12% fall in energy output, though, Shell’s share price is likely to feel its clean energy transition and the effect it has on profits.

The 15 analysts offering 12-month price targets on the Shell share price have a median target of 1,901.11p according to the FT, which represents a 28.06% increase from 15 June’s close.

MarketBeat records ratings from six Wall Street analysts for Shell in the last 12 months, with three buy, two hold and one sell rating resulting in a consensus hold.

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