Oil biggie Royal Dutch Shell (LSE: RDSB) has seen a 4% increase in share price in today’s trading so far. At 1485p, its share price is now at levels not seen since mid-March this year. To me, this raises two questions. The first is why is this happening? And the second question is what I should do next – buy, sell, or hold?
Why is the Royal Dutch Shell share price rising?
First, let us consider what just happened. I would be tempted to think that it is investors rushing into buy today after yesterday’s stock market correction. The FTSE 100 index was down some 2.4% yesterday compared to the week before, due to pretty much consistent weakening. The Shell stock was also a loser, to be sure. But over the past week it has lost much less value, 1.7%, than the broader market.
I reckon the run-up today is a result of its plan to sell off its business in the Permian Basin in the US to ConocoPhillips, another hydrocarbons explorer. This sale will bring $9.5bn in cash for Shell, and has been in process for a few months now. One reason for it is that it allows the company to focus on its most profitable oil and gas operations.
Becoming more environmentally friendly
This sale can also be seen in the context of its target to become a net-zero emissions energy business by 2050. In fact, it has been coming under increasing pressure to be so. Recently, a court ruling in the Netherlands called for big cuts to its global carbon emissions in less than a decade. While Shell has challenged the ruling, it may have accelerated the process nevertheless.
Besides the sale of oilfields in the US, the company has also been making strides towards clean energy. It has just said that it will build a big biofuel facility in Rotterdam in the Netherlands. This will produce sustainable aviation fuel and renewable diesel, which are lower carbon fuels. It has also recently undertaken its first renewables project in the Middle East, with the Qabas solar plant in Oman. And these are just some of the examples of the changes underway for it.
What’s next for the Shell stock?
How successful it ultimately is in becoming a renewables giant, just like it is in the oil and gas sector today, remains to be seen. I reckon this is a nagging doubt that may have kept its share price relatively muted despite a sharp rise in oil prices over the past year and an improvement in both its own performance and prospects as a result. Its share price is still around 35% below the pre-pandemic highs of January 2020.
Another reason could be that its dividends are still low. It has a dividend yield of 3.8%, which is similar to the average FTSE 100 yield. But it is much lower than its double-digit pre-pandemic yield.
I think as it keeps progressing in the direction of carbon neutrality and increases its dividends further, its share price can keep rising. I have already bought it and think it is a good stock to load up on for the foreseeable future as well. So, it is a buy for me.
