In a turbulent year for energy stocks, Royal Dutch Shell has been among the worst performers in the industry. It slashed its dividend in April, announced thousands of layoffs, and has now written down its assets twice, to the tune of more than $22 billion.
Shell [$RDS.B] stock is down 42% this year, worse than the Energy Select Sector ETF [$XLE], which is down by 33%. Even so, MKM Partners analyst John Gerdes thinks Shell shares could bounce back by 68% as the company leans out and pivots its business to add more renewables. Gerdes believes Shell’s investment in renewables isn’t just an attempt to mitigate regulators; he forecasts that the projects that Shell is investing in like wind energy could serve up 10% returns on average.
Gerdes’ price target is $57, 68% above the stock’s price before the report was released. Shell stock jumped 3.3%, to $34.62, on Wednesday following the upgrade.Make no mistake, Gerdes isn’t saying Shell is going to return to its prior results pre-pandy. The oil goliath earned $17 billion on $350 billion in revenue in 2019. He predicts Shell will earn $9.6 billion on $287 billion in revenue in 2022. Here’s Why Plug Power Has Gone Parabolic Since June
Be that as it may, cost cuts mean that Shell should be able to pull in more than enough capital to invest in its best projects, rotate more than $2 billion a year into renewables by 2023, and cover its dividend with substantially room to spare. From 2021 through 2025, Gerdes hazards a guess that Shell will churn out about $91.5 billion of free cash flow, which is about 70% of the company’s market cap.
It no longer has the double-digit dividend yield that it had at its 2020 peak, but its current yield around 4% isn’t something to scoff at compared with corporate bonds and sovereign debt. Shell has one of the largest networks of gas stations in the world, and its renewables could build on that network—it has already added about 50 hydrogen refueling stations in the U.S. even though that technology is still coming to fruition.