Royal Dutch Shell SWOT

Overview

The data suggest a very positive outlook for Royal Dutch Shell (RDS). Their financial position appears strong enough to withstand continued volatility in the energy market. Consolidation strategies combined with the divestiture of low return assets should increase operational and economic efficiency. RDS should exploit opportunities for electric power production and reduce its carbon footprint following their aggressive timeline.

Strengths	Weaknesses
Financial Stability Industry Experience Innovation	Size (reduces flexibility) Stale Assets
Opportunities	Threats
Alternative energy Carbon Footprint Asset restructuring	Peak Oil Demand (oil oversupply) LNG and Crude Prices Volatility

Strengths

• Financial Stability: Shell’s market valuation of $42.3bn is currently the highest of any oil-producer (Mussprat, 2019). A net income of $24bn (2018) is second-best in the industry (Mussprat, 2019). In the last four years, Shell has met its commitment to increase cash flow by $10bn from operations and new investments (“Strategy,” 2019). Shell has set a target from 2021-2025 of $125bn in shareholder distributions in the form of dividends and share buybacks. They also plan to increase free cash flow to $35bn by 2025 (“Strategy,” 2019). The execution of these goals should help the company maintain a strong financial position.
• Industry Experience: Shell began in 1833 in a small antique shop in London. Shell was named when founder Marcus Samuels started importing exotic shells from the Far East for resale (“Company History,” n.d.). This is how Shell first dabbled in import/export transportation. Marcus Samuels passed the company to his sons, who began to experiment with the transport of bulk oil using steamships. The company owned the first oil tanker to ever pass through the Suez Canal. Now 185 years later, Shell continues to be a dominant player in the oil and transport industry. They have a hand in every downstream market from extraction to refining, to transport, to resale. 
• Innovation: One of the tenets of the organizational culture has been innovation. This is what has allowed Shell to last 185 years which is 165 years longer than the average life of an S&P 500 company (Sheetz, 2017). Shell developed the first oil tankers to carry bulk fuel in the hull of the ship rather than barrels (“Company History,” n.d.). Today, Shell continues to invest in innovation and has a division entirely devoted to alternative power. Alternative energy is an opportunity that is discussed later in this text.  

Weaknesses

• Size: Shell’s size limits its rapid flexibility to changing dynamics. RDS employs over 81,000 people (Strategy, 2019). It has a global presence that includes refineries, chemical processing, and 43,000 branded fueling stations in 80 countries (Oller, 2018). Size is an advantage but also a weakness. For example, it is not easy to find buyers for large underperforming assets. If oil demand declines precipitously in the next twenty years, it would be near impossible for Shell to unwind its revenue reliance on oil that quickly.   
• Stale Assets: Shell’s assets represent a weakness as well as an opportunity. Shell has been actively attempting to divest itself of high cost/low return assets which are degrading its profit margins. They plan an additional divestiture of $10bn in the next two years (“Shell to divest,” 2018). It is important to note that they are selling these assets at a loss. This can be expected to continue as the price of natural gas remains low for the foreseeable future. How well Shell can manage these unprofitable assets and what price they can get will continue to be a potential point of weakness for the company.

Opportunities

• Alternative Energy: Shell is well aware that the energy industry is shifting its focus to clean alternatives to oil. This is an opportunity for future growth. To that end Shell recently took part in a 50/50 joint venture to develop wind power off the coast of New Jersey (“Electricity,” 2019). Additionally Shell has business interest in five operational onshore wind farms in the US and one in Europe. Shell is also strategizing to become a dominant player in the electricity industry (“EDF Renewables,” 2018). To do this, Shell is planning to develop what they are calling the “integrated power system” (“EDF Renewables,” 2018), in which Shell attempts to operate at every touchpoint of power production and consumption markets. This involves production elements such as wind, solar, and natural gas as well as storage and distribution to end-users. In 2017 Shell signed a deal with Ionity to provide 500 charging points across Europe by 2020 (“EDF Renewables,” 2018).  These activities are a step in the right direction, and Shell should continue to develop these new markets.  
• Carbon Footprint: RDS has set forth an aggressive emissions reduction strategy to reduce its carbon footprint by 50% in 2050 (“Royal Dutch Shell,” 2018). To facilitate this, Shell will incentivize managers and directors by making 10% of their bonus contingent on how well they reduce greenhouse gas emission (“Royal Dutch Shell,” 2018). 
• Asset Restructuring: Between 2016 and 2018, Shell divested themselves of $30bn in underperforming assets. Most notably stakes in Canadian oil sands and the UK North Sea (“Shell to Divest,” 2019). Going forward, Shell plans to allocate $25bn to share buybacks. Beyond this, Shell has a new two-year initiative to shed an additional $10bn in assets. This asset restructuring provides Shell with the opportunity to reposition itself to focus on higher-margin operations.  

Threats

• Peak Oil Demand: The concept of peak oil originated as a factor of production. Namely the point at which the oil reserves of the world would reach a maximum rate of extraction after which it would decline, and the world would slowly run out of oil. With the introduction of new drilling and fracking technology, those theories had to be dismantled. The concept is now one of consumption demand (Lynch, 2018). Shell expects this demand to peak between 2020 and 2040. It is encouraging that Shell is aware of this, but it still remains unseen how well they can truly adapt to this change and how well they will be positioned for alternative energy solutions. Also, the variability of future demand is unknown, and the majority of Shell’s operations still rely on oil production and distribution. Any rapid change would be too challenging for Shell to manage.
• Natural Gas and Crude Price: Analysts expect natural gas prices to remain low for the foreseeable future. While Shell has been divesting itself of some natural gas assets, low prices set against the high cost of production may affect profitability as well the price Shell can get when attempting to recoup losses on natural gas fields (Orland, 2019).  Despite its dominant financial position and substantial 2018 profits, Shell’s Q2 profit surprised to the downside on lower oil prices and weaker demand (Agnitori, 2019). They missed analyst’s expectations by 25% (Agnitori, 2019). This highlights the connection between the market price environment and profitability.
• Volatility: Both the discussion of demand and energy price fluctuation, point to the broader topic of volatility. In other to understand the impact of volatility it is important to know how the refining process is affected by price changes. Refineries are most profitable in stable conditions. This is because they operate with a flow process. Fuel is continually bought for refining, processed, and sold as a refined product. In a perfect market you could always purchase at one price and sell at a higher price. However it is not uncommon for an oil refiner to buy at one cost only to have the price of fuel drop thereby compressing or eliminating profits. Because refineries use a continual process, they don’t shut off when the purchase price of oil spikes. Further complicating this is onsite storage. If a refinery is holding unsold refined fuel and the price drops, it may be forced to sell the fuel at a loss. This is a vulnerability inherent in the oil production and refining industry. While Shell has a proven track record of managing this business very well, volatility is a constant threat controlled by outside forces such as news events, regional instability, and competitive tactics.

Conclusion

Shell is a viable company with strong earnings and financial resources to continue operating. Shell is proactively managing underperforming assets. The unknown variable is decreasing demand and excess supply. Complicating this further, alternative energy and carbon reduction initiatives will likely drive increased regulatory oversight and force oil companies to invest in alternative revenue streams.

References

Agnihotri G. (2019, September 11)  Royal Dutch Shell needs to get this right. Retrieved from https://seekingalpha.com/article/4291091-royal-dutch-shell-needs-get-right

Company History (n.d.) Retrieved from https://www.shell.com/about-us/our-heritage/our-company-history.html

EDF renewables and Shell invest in New Jersey offshore wind (2018, December 19). Retrieved from https://www.shell.us/media/2018-media-releases/edf-renewables-and-shell-invest-in-new-jersey-offshore-wind.html

Electricity (2019).  Retrieved from https://www.shell.com/energy-and-innovation/electricity.html#iframe=L3dlYmFwcHMvcG93ZXJfcGxheWVyLw

Lynch M. (2018, June 29) What Ever Happened To Peak Oil? Retrieved from https://www.forbes.com/sites/michaellynch/2018/06/29/what-ever-happened-to-peak-oil/#7d713a91731a

Muspratt, A. (2019, May 01) The World’s Biggest Oil Companies in 2019. Retrieved from https://www.oilandgasiq.com/strategy-management-and-information/articles/oil-and-gas-companies

Oller S. (2018, Octber 12) Shell recommits and returns ro U.S. retail. Retrieved from  https://www.cspdailynews.com/fuels/shell-recommits-returns-us-retail

Orland K. (2019, August 22). The $30-billion exodus: foreign oil firms keep bailing on Canada’s energy sector. Retrieved from https://business.financialpost.com/commodities/energy/the-30-billion-exodus-foreign-oil-firms-are-bailing-on-canadas-energy-sector

Sheetz, M. (2017, August 24) Technology killing off corporate America: average life span of companies under 20 years. Retrieved from https://www.cnbc.com/2017/08/24/technology-killing-off-corporations-average-lifespan-of-company-under-20-years.html

Shell profits plunge on lower oil prices  (2019, August 1) Retrieved from https://www.bbc.com/news/business-49189416

Shell sells oil sands assets as boss warns on clean energy challenge. (2017, March 9). Retrieved from https://www.theguardian.com/world/2017/mar/10/shell-sells-canadian-oil-sands-as-boss-warns-of-losing-public-support

Shell to divest another $10B in assets over 2 years (2019, February 1). Retrieved from http://www.kallanishenergy.com/2019/02/01/shell-to-divest-another-10b-in-assets-over-2-years/

Strategy (2019). Retrieved from https://www.shell.com/media/news-and-media-releases/2019/management-day-2019-shell-strongly-positioned-for-the-future-of-energy.html

Royal Dutch Shell tries to reckon with climate change (2018, December 8). Retrieved from https://www.economist.com/business/2018/12/08/royal-dutch-shell-tries-to-reckon-with-climate-change