Shell has received its first upgrade following yesterday’s trading update.
Barclays has upped its forecast for first-quarter net income by 8% to US$8.4bn, citing higher integrated gas production and trading and lower upstream costs and tax.
The oil giant itself said earnings from oil and gas trading were expected to be ‘significantly higher’ in the period to end-March as the price of both commodities has soared.
Shell is one of Barclays’s favourite energy stocks at present and alongside rival BP was highlighted in a note last week pointing to the potential for integrated oil companies (IEC) in a world of rapidly changing energy needs with decarbonisation seen as a major plus for the group.
“The energy sector is re-inventing itself, and those companies which embrace this have the potential to deliver profitable decarbonisation,” said the bank.
"Years of under-investment by the industry have limited spare capacity, and energy prices were already rising to reflect this, but the valuations for the sector are at close to all-time lows.
“We see the market as needing a new way to analyse energy companies vs. the historical asset-based approach.
“Effectively the opportunities from transition and decarbonisation outweigh the long-term decline in fossil fuels.”
Barclays sees the range of solutions that the global energy companies can offer – from biofuels, to hydrogen, to renewables, to nature-based offsets – as unique, especially for those businesses that operate across different geographies.
“Essentially the companies start to offer something that they haven’t before –carbon management.
"In doing so, the business model switches from commodity-style in nature to being one that offers energy as a service."
Depending on how successful they are, Europe’s Integrated oil groups can take out 1.4bn tonnes of CO2 and generate up to $50bn of EBITDA through decarbonisation policies, says Barclay.
Even on a base case 1bn tonnes or carbon are removed and earnings boosted by US$22bn, some 20% of the sector’s current profitability.
It won't be a quick transformation, low-carbon spending for the IEC group,is currently close to 15% and likely growing towards 25% by 2025, is clearly a drag on free cash flow.
“We calculate that c.20-25% of pre-energy transition free cash flow will be allotted over the next five years to build low-carbon businesses that are unlikely to scale in any significant way before 2030.
"BP, Shell (price target 3,000p) and Total are the three companies that we see as executing this strategy on a global scale".
Shares in Shell were up 3% at 2147.5p and BP 2% at 385p.