Shell’s ‘positive’ credit profile backed by energy transition approach, says Moody’s 

As quarterly earnings hit oil major, ratings agency says renewables could ‘cushion’ impact of climate transition

Moody’s deems Royal Dutch Shell’s investment in low-carbon energy a contributing factor to the oil major’s positive long-term credit profile, although it may face headwinds in the shorter term.
Shell published today its second quarter results, reporting lower than the expected earnings — $3.5bn instead of the forecasted $4.93bn. It reflects “lower realised oil, gas and LNG prices,” the company said.
However, in a special research report published on Tuesday, Moody’s said it views Shell’s more proactive energy transition strategy compared to most of its rivals “as credit positive in the longer term”.
“Though improving, investments in lower-carbon activities, such as renewable power generation and biofuels, are currently not matching the average returns being generated from the development of traditional oil & gas upstream projects,” the report stated, saying that it was therefore unlikely that such investments would enhance Shell’s earnings and cash flow over the next five years.
The report added: “However, Shell’s strong global position in natural gas, the fossil fuel with the lowest CO2 emissions, and investments in its New Energies business, which runs its low-carbon energy operations such as renewables, could cushion the effects of the energy transition on the company’s traditional oil & gas business over the long term.”Shell, which has an AA2 rating from Moody’s, aims at investing on average $1-2bn in its New Energy business annually for 2018-20, close to 5% of capital spending; and plans to increase it to 10% for 2021-25.
Sven Reinke, author of the report and Senior Vice-President and Lead Analyst for Shell, told RI: “Shell’s lower-carbon business and growing lower-carbon operations could help defend such a high rating, AA2, in the very long term”.
According to Reinke, without investing such amounts in the New Energy business Shell would have higher operating cash flows for 3 or 5 years, but that would not improve its credit profile.
On the equity side, Sarasin and Partners said in July it had sold Shell’s stock because its short-term expenditure on fossil fuels inconsistent with the Paris Agreement.
Andrew Grant, Senior Analyst at environmental think-tank Carbon Tracker, told RI that there is no doubt that Shell can be seen as the most progressive company “on the oil patch”. Grant said: “However, true compliance with the Paris goals will require curtailed use of both oil and gas – Shell has yet to demonstrate that our planet’s finite limits are reflected in its investment strategy,” he said.