For years, renewable energy has been touted as the source that will very soon replace fossil fuels. Yet renewable energy sources accounted for only 12.5% of global primary energy consumption in 2020. Admittedly, there has been a sharp increase in the share of renewables in the global energy mix in recent years. decades. Fossil fuels still cover more than 80% of the world’s energy needs.
This means that while a transition to renewables seems inevitable, it would be much slower than expected, spanning several decades. Moreover, fossil fuels will have a crucial role to play in making this transition possible. In other words, it is prudent to take a holistic view when considering the energy sources needed to meet global demands.
Here are two oil companies doing just that.
Shell (SHEL 1.83%) believes that expanding into the fast-growing clean energy segment is a good long-term business decision. As an established global energy company with huge operations, the integrated energy company believes it is well positioned to lead this transition.
By 2025, Shell aims to have around half of its total capital expenditure going to low- or no-carbon products and services. Most of this spending is expected in segments such as biofuels and hydrogen, power, carbon capture and storage, and convenience retail, including electric vehicle charging. It also includes expenditure from Shell’s chemicals and lubricants business. Shell expects to incur between $19 billion and $22 billion in base capital expenditure annually.
By 2022, Shell expects spending on low-carbon or zero-carbon products and services to account for around a third of its total capital expenditure. At 2.9%, Shell’s dividend yield is below that of its major peers.
However, the company is committed to annual dividend growth per share of around 4%. In addition, the company’s debt ratios compare favorably with those of its peers.
Overall, Shell is looking to move away from oil and gas and towards renewable energy. And he laid out a clear strategy for the same.
2. Total energies
French oil and gas giant TotalEnergies (TTE 0.74%) aims to steadily develop its activity in renewable energies in the years to come. By 2050, the company expects about half of its sales to come from renewable energy and electricity. To that end, the company plans to spend $3.25 billion to $4 billion a year on renewable energy and electricity through 2025.
Additionally, it expects to spend $650 million to $800 million a year — or about 5% of its planned annual capital expenditure — on hydrogen and biofuels during this period. Importantly, TotalEnergies plans to spend about 57% of its $1 billion research and development budget for 2022 on clean energy technologies.
TotalEnergies believes that being a forerunner in the rapidly growing field of renewable energy would help it establish itself firmly in the long term. The company believes the time is right to secure long-term positions in land, sea and grid interconnections. Moreover, it is a strategy that TotalEnergies successfully implemented in the oil and gas field decades ago.
TotalEnergies aims to combine renewable and flexible production, storage, trading and supply. Such an integrated approach will help it capture value in the volatile electricity market. By keeping 30% of its generation exposed to market prices, the company believes it can capture more upside than regulated utilities, which have all of their generation covered by PPAs (power purchase agreements).
TotalEnergies did not cut its dividend in the difficult year of 2020, although its peers BP and Shell did, showing a commitment to shareholders. With a dividend yield of 5.7%, the stock looks attractive.
Should these oil stocks be on investors’ radar?
Overall, TotalEnergies and Shell are trying to position themselves for long-term growth. But they are also focusing on their oil and gas operations to generate value for their shareholders, until renewable energy-focused investments generate higher returns than oil and gas projects.
While the strategy appears sound, investors should note that these companies may generate lower short-term capital returns than their counterparts taking a more fossil fuel-focused approach. The latter could give favorable results in the short term, because the prices of energy raw materials are currently high. .