The Royal Dutch Shell (LSE: RDSB) share price used to be a staple holding for income investors. That was until the company cut its dividend last year for the first time since the Second World War.
Volatile oil prices have always been a risk for the enterprise. In the past, the group’s size and diversification has helped it manage this uncertainty. However, I think the threat of climate change now presents an even more considerable risk for the company and one that could jeopardise its very existence.
Could the Royal Dutch Shell share price fall to zero?
In theory, any investment can go to zero, but this rarely happens, especially with blue-chip companies. For a stock to drop that far, the underlying business would have to be insolvent. Its liabilities would have to exceed assets.
It might seem silly for me to suggest Royal Dutch Shell could ever end up in this position. Nevertheless, it’s something we need to consider, especially taking into account the group’s contribution to climate change.
Oil companies are one of the biggest producers of emissions globally. In some cases, groups are starting to face lawsuits regarding their impact on the environment. This reminds me of the fight against Big Tobacco and, more recently, opioid producers in the United States. In both cases, a tidal wave of lawsuits resulted in hundreds of billions of dollars of claims being awarded against these operations.
While there is no evidence to suggest Shell and its peers will face the same kind of financial penalties right now, it’s not something I’m going to rule out.
To get some idea of the sort of financial penalties the company might have to pay, we only need to look at the money BP had to hand over in the wake of its Gulf of Mexico disaster. In the decade after the disaster, BP and its partners paid out $71bn in fines and clean up costs. That was around 40% of its market value before the spill.
Change is afoot
These are the reasons why I think there’s a chance the Royal Dutch Shell share price could fall to zero at some point in the next few decades if claims against the company start to grow.
However, there are also reasons to be optimistic. The company is already starting to change. It’s investing billions in renewable energy technology and diversifying away from oil & gas. The group also has a robust balance sheet and $400bn of assets it could borrow against, or sell-off. With this level of financial flexibility, I think it’s unlikely the stock could fall to nothing.
Still, it isn’t something I want to gamble on. It’s clear the climate is changing, and this is going to affect the whole world. Some companies may suffer more than others, and I don’t want to own any stocks in my portfolio that may struggle to adapt to the new normal.
I think the Royal Dutch Shell share price will struggle, which is why I’m not a buyer of the stock right now.
