SHELL SWOT Analysis 2020

Shell SWOT Analysis 2020

Royal Dutch Shell, commonly known as Shell, is one of the world’s largest oil and gas companies and one of the largest private companies in the world. It is one of the so-called ‘supermajors’. Shell origins go back to the 19th century. Although its origins lie in the Netherlands, it is now a truly global company.  In this article, we will execute a SWOT Analysis of Royal Dutch Shell.

In case you want to refresh your knowledge of this strategic analysis tool, I recommend you to check out this article: SWOT Analysis.

Table of Contents

Company Fact Sheet

Name: Royal Dutch Shell (better known as Shell)
Year Founded: 1907
Industry: Oil and gas
Products & services: LNG, Lubricants, Natural gas, petrochemicals, Petroleum
Biggest Competitors: Total, Chevron, Exxon Mobil, and BP
Headquarters: The Hague, Netherlands
Number of employees: +/- 83.000 (2019)
Revenues: $ 344.87 billion (2019)
Net income: $16.43 billion (2019)
Price / Earnings (PE) ratio: 9.5 (June 30, 2020)

Shell SWOT Analysis (2020) Infographic

In the Infographic below, you’ll see an overview of the strengths, weaknesses, opportunities and threats for Royal Dutch Shell.

Swot Analysis Infographic of shell

Strengths

Size and Financial Resources

Size matters in the energy sector. Shell has over 80.000 employees and is active in 70+ countries with an integrated supply chain. Because of its size, it has relatively more financial resources and flexibility to get through phases with lower profitability.

Shell has a strong cash flow which helps them make investments for future gains. To illustrate, in 2018 Shell invested $25 billion in capital and one billion in research and development. By doing this, Shell makes sure their business remains viable in the future.

Part of their financial resources can potentially be used for M&A activities. A good example of this is the acquisition of BG Group (oil and gas firm from the UK) in 2016.

Vertical Integration

Shell is highly vertically integrated, in upstream as well as downstream areas. The company is active in all parts of the supply chain: from searching for oil (exploration) to production, refining, transportation, and marketing.

This high level of vertical integration has several advantages:

  • Economies of scale;
  • Synergies;
  • Opportunities for cross-channel marketing

Research and Development

Shell invests heavily in research and development. In 2018, the investment in R&D was $1 billion. Shell employs many scientists, engineers and researchers. Their aim is to improve the efficiency of their products, processes and operation. This is necessary to maintain a sustainable business in the future. Shell does not only individually on R&D. The company has many collaborations with universities, laboratories, public entities, and technology start-ups.

Examples of Shell’s R&D:

  • Shell GameChanger: this program from Shell works with start-up companies on innovative ideas to impact the future of energy. With this program, Shell provides these startups with support, funding and expertise.
  • Shell Technology Centers: Shell has innovative hubs in Amsterdam, Houston and Bangalore. Thousands of employees are working in research and development in these centers. For instance, these technology centers created technology turning natural gas into liquids for lower-emissions transport.

Exploration Capabilities

Shell invests heavily in finding new reservoirs of oil and gas. The exploration process is becoming increasingly more difficult. Oil & gas companies need to drill deeper to reach undiscovered resources. Finding new oil & gas resources is a long and complex process. Shell has proven that they have the expertise to keep finding new reservoirs.

Recent examples of Shell’s successful exploration:

  • In 2018 Shell made several discoveries, in the US Gulf of Mexico and Nigeria. Shell keeps investing in new opportunities for exploration.
  • In 2019, Shell announced a significant discovery off the coast of Australia. 

Wide Product Portfolio

Shell has a diversified product portfolio. The company is active in a variety of markets. This exposes the firm to crude oil, natural gas, oil product and chemicals prices. With this diversified product portfolio, Shell mitigates the risks of price volatility in one of these markets.

This is helpful in the current market, where oil prices have been low and production has been cut. During this period, natural gas production have not lowered as much.

Shell even supports supplies for soaps and supplies for hand sanitizers, to help the response against Covid-19. Read more about that in this article.

Shell is also geographically diversified. For instance, the firm produces natural gas in Asia, Europe, Oceania and North America.

Strategic Partnerships

Shell has partnerships in many areas, including governments, NGO’s, energy producers, industry bodies and local organizations. The firm’s extensive number of partnerships helps them maintain a strong market position.

Shell's Strenghts According to Shell

It is also interesting to see what Shell’s strengths are according to Shell itself. Specific for their chemicals department, Shell lists several strengths on their own corporate website

  • Joint ventures and industry associations
  • Strong heritage, scale and performance
  • Putting safety first
  • World-scale assets in strategic locations
  • Process technology advantages
  • Part of an integrated company

Interestingly, I see several similarities with the SWOT Analysis from this blog.

Weaknesses

Dropping Reserves

Shell’s oil and gas reserves have been dropping in recent years. In 2019, the number of production years left in Shell’s oil and gas reserves decreased for the sixth year in a row. In addition, Shell’s reserves are falling faster than that of its competitors. For Shell, this means the firm has to keep finding or buying new reservoirs of oil and gas.

In 2019, Morgan Stanley named the lack of reserves as a reason to downgrade its rating for Shell’s stock.

Low Presence in Renewable Energy

The world’s energy supply is changing towards more renewable, sustainable sources of energy. Examples of such types of energy are wind and solar energy. Mobility is also changing towards electric vehicle charging. Shell is investing in these new technologies & types of energy, but its origins lie in fossil fuels. In 2020, reports showed that Shell spent less on investments in renewable energy than targeted.  Shell only spent a fraction of its spending on green energy projects.

Shell plans to invest more in renewable energy. At this moment however, Shell is also cancelling planned investments. The company made this decision because of the problematic market situation in the oil industry. It will be interesting to see whether the current market will impact the spending on renewable energy.

Dependency on Oil Price

Shell’s profits strongly depend on the oil price.  The oil price has fell as a consequence of covid-19, which decreased the demand for oil. The current low oil price reduces the value of Shell’s assets as well as its revenues. Once more, this demonstrates that Shell has to make a transition towards other sources of energy. Historically, Shell always had a high, stable dividend. However, because of the current market struggles, Shell took the drastic decision to cut dividends by two-thirds. This illustrates Shell’s dependence on the oil price.

Opportunities

Economic Growth

One of the key drivers of demand for Shell’s products is economic growth. Although the economic growth for 2020 has been extremely negatively impacted by the coronavirus, in the long term the global world economy is expected to grow.

Especially for LNG (liquid natural gas), the economic outlook is positive. In 2019, global demand grew by 13%, and is expected to keep growing in the coming decades.

New Discoveries

Exploration activities may lead to new discoveries which helps the firm to maintain its market position. As mentioned under Strengths, Shell has strong exploration capabilities.

Renewable Sources of Energy

Shell’s size and financial resources allow them to invest heavily in renewable sources of energy. There are many opportunities for Shell to increase their presence in green energy sources. It is up to Shell to take advantage of these opportunities.

Partnerships / Mergers & Acquisitions

To grow further, partnerships could help Shell to increase their expertise in renewable energy sources. It could also help the company to rapidly gain a bigger market share in this market. Corporate development activities could speed up this process as well. As became clear from Shell’s (failed) takeover bid to buy Dutch Energy firm Eneco in 2019, Shell recognizes the potential of mergers & acquisitions. Eneco has a strong focus on renewable energy.

Threats

Macro-economic Uncertainty & Price Volatility

The oil price has fell as a consequence of covid-19. The pandemic decreased the demand for oil. The current low oil price reduces the value of Shell’s assets as well as its revenues. Once more, this demonstrates that Shell has to make a transition towards other sources of energy. Historically, the current market outlook is highly uncertain. It is unclear when the demand for oil will rise again. Additionally, Saudi Arabia and Russia have shown to be willing to ramp up their oil production. Increasing supply will again lower oil prices.

Competition

The oil & gas market is highly competitive. Shell has major competition from, among others, the following large firms, together called the ‘supermajors;

  • BP, a British oil and gas company headquartered in London, UK;
  • ExxonMobil, a US oil and petrochemical company with global presence;
  • Total, a French oil and gas company;
  • Chevron, a US-based energy corporation. Chevron acquired Texaco in 2001;
  • Eni, an Italian oil and gas company;
  • ConocoPhillips, an American multinational energy firm.

Aside from these so-called supermajors, Shell has competition from corporations such as Saudi Aramco (Saudi Arabia), Petrobras (Brazil), CNPC (China), Gazprom (Russia), and many more.

Shift Towards Sustainable Energy

Mentioned several times already in this article, one of the biggest challenges faced by Shell is the transition to renewable energy. This is both an opportunity and a threat. With reserves decreasing and a shift towards renewable sources of energy, the current business of Shell is not sustainable in the long-term future. Shell does not have another choice than to invest heavily in new, sustainable sources of energy.

Additions

Do you have any additions or do you agree with some of the factors covered in this Shell SWOT Analysis? Drop a comment below!

Interested in more strategic analysis? Take a look at other analyses here.

References

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