Shell (SHEL) is about to launch a new offshore drilling platform in the Gulf of Mexico. Another platform, similar to the one it is about to deploy, may launch in other parts of the Gulf in 2024. The company has continued to make massive investments in oil production despite the risk that authorities could further restrict drilling because of climate concerns.
According to a Wall Street Journal report, Shell invested about $3 billion to build Vito, the drilling platform that it is gearing up to deploy in the deep waters southeast of New Orleans. The project is a joint venture with Norway’s Equinor (EQNR), with Shell being the majority partner with a stake of 63%.
Is the Oil Drilling Business Now a Game of the Brave?
During his presidential campaign, President Joe Biden said that he would block new oil drilling projects on federal land. That pledge and the growing pressure from environmental groups to curb activities that contribute to climate change have resulted in an uncertain atmosphere for oil companies. However, Shell is taking the risk and pressing on with projects. The company is even confident in the long-term future of its Gulf projects to generate steady returns.
Shell Figures Out How to Better Approach Offshore Drilling
When it comes to drilling out, production from existing wells can decline by up to 20% a year, according to Shell’s estimates cited in the report. It means that additional drilling platforms may be needed to just maintain the output.
Shell has figured out how to build cheaper and more efficient drilling systems. Vito is only about one-quarter the size of an existing platform called Appomattox, but it is expected to produce more oil relative to its size.
It Is Not All About Oil
Environmental groups may have issues with Shell’s Vito project and others coming up in the Gulf, such as the one named Whale that is expected to be ready for service in 2024. However, the company’s goal is to actually cut its oil production over time. Shell, instead, wants to invest more in alternative energy sources. The company is about to start work on the construction of what it bills as Europe’s largest renewable hydrogen plant in the Netherlands.
Shells Writedown Reversal
The oil business is booming for Shell amid the high commodity prices. The company expects to record a gain of more than $1 billion in its refining business for Q2, as the profit margin has increased compared to the Q1 level. Additionally, Shell is reversing previous asset writedowns of up to $4.5 billion.
Wall Street’s Take on SHEL
The Street is cautiously optimistic about the stock with a Moderate Buy consensus rating, based on two Buys versus one Hold. The average Shell price target of $67.33 implies 38% upside potential to current levels. Shares have increased more than 25% over the past year.
Stock Investors Loving Shell
TipRanks’ Stock Investors tool shows that investor sentiment is currently Very Positive on Shell, with 4.7% of portfolios tracked by TipRanks increasing their exposure to SHEL stock over the past 30 days.
Key Takeaway for Investors
Shell will ultimately need to slow down its oil business. The great opportunity it has now is that it can take advantage of the high oil prices to make more money to invest in its renewable energy projects. That way, the company may make the transition from the oil industry with little impact on its profit or dividends.
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