So news that Royal Dutch Shell (RDSB) is going all vertically integrated and looking to expand its nascent utility arm by renaming its 2017 purchase of First Utility as Shell Energy and offering new customers a discount on their fuel bills. As part of an ongoing slow shift away from classic fossil fuels, this approach has some merit to it...but it leads to one very obvious question: how is Shell going to make this business even mildly relevant to its business?
Aircraft carrier-sized businesses such as Shell always have to think big. It was telling to read some of the comments made by its Energies division head, who noted that it would have to make acquisitions to supplement the current 710,000 households that First Utility supplies. You might call it arrogance but it certainly shows some element of intent when it describes Scottish & Southern Electricity (SSE) - a company which I have previously described as the most boring in the FTSE-100 - as 'small in the great scheme of things'. You will recall SSE is scouting around for a new strategy ever since its mooted merger with the German-owned nPower (another 'big six' player) fell apart due in no small way to the comedy government price cap policy. If Shell has any ambitions to be a utility giant then instead of just joining the current 'big six' it is going to have to buy one or two of them...which is quite useful as nPower and SSE would clearly be up for some kind of deal whilst other players such as EDF have already had press articles written about them thinking about exiting the market.
As I have noted before, the government price cap policy ultimately discourages competition and rather than Shell being a big new competitor...I think it deepens the likelihood that rather than the big 6 becoming the big 7, we end up with the big 4. And you know ultimately which way margins for the sector will go with this. I cannot see Centrica (CNA) being taken over by Shell given the very political nature of such a bold move, but fortune favours the brave and if Shell really wants to make a big splash this is what it should do. Longer-term stock market watchers would note this would bring the old 'British Gas' combined business back together, which would go to show how much the world has changed since the heydays of 1980s privatisations. More likely is that Shell buys up a couple of more marginal (but significant in customer numbers) players for know-how and internal learning to see if this idea to be an even more vertically integrated business can fly.
It probably sees, as I do, that due to the uncertainty of the government's price cap policy, certainty and investment levels in the sector are low...but ultimately energy supply/distribution is not going to go out of fashion...even if the use (and production) of fossil fuels might. And of course when you are Shell you can take a longer-term view on all of these things and look to position yourself for better times. Personally I still think SSE is boring but Centrica has some 'bottom drawer' value characteristics and I remain long/a buyer. I have been wrong on the latter recently but am not bailing out...and Shell looking to up its broader market exposure in this area indicates to me one of the reasons why not to.
Filed under: Royal Dutch Shell, SSE, Centrica, Woodford, Kier, MySale, Matthew Earl, Coral Products, Purplebricks
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