Shell plc SHEL is signaling a strategic shift by selling some of its carbon projects portfolio as the carbon offset market faces challenges. The strategic move aligns with the CEO, Wael Sawan’s focus on fossil fuel energy that provides higher returns.

Although the company once aimed for significant growth with these low-carbon projects, it now wants to shift away from operations that don’t provide a strategic advantage and premium returns, such as offshore wind energy projects.

Challenges in the Carbon Offset Market and SHEL’s Decision

SHEL launched its portfolio of carbon offsets in 2018 with the target of achieving 120 million carbon credits annually. Within three to four years, SHEL became the world’s largest buyer of carbon credits.

Once an attractive avenue for climate change, the carbon offset market started facing challenges recently.The spot prices for REDD+ credits dropped from $12.50 per credit in 2022 to $3.60 in 2023. The reasons for the decline are reduced demand and uncertainty about the environmental impact of some projects. Despite the hurdles, the voluntary carbon market is projected to rise to $950 billion by 2037 from its current $2 billion value. However, SHEL, under its new leadership, has planned to change its focus.

SHEL’s Transition From Carbon Projects

SHEL started changing its strategy after Wael Sawan took over as the new CEO in 2023. Under his management, the company announced to cut in its plan to spend $100 million a year on new carbon credits. The company had shifted its focus to more profitable fossil fuel ventures. The strategy shift is also evident in its recent carbon offset exit where the company plans to sell its nature-based carbon projects.

The company is now considering different approaches to close the deal. One of the options is to become a minority holder by selling some of its holdings but agreeing to keep buying the credits and the other is to sell the projects completely without any commitment to buy the credits.

What Lies Ahead for SHEL and the Carbon Market?

As SHEL reduces its reliance on nature-based solutions, it is exploring different engineered carbon removal technologies like Direct Air Capture. This technology removes carbon dioxide directly from the air and offers a more permanent solution but is constrained by high costs and scalability challenges.

SHEL’s Zacks Rank and Key Picks

London-based Shell plc is one of the primary oil supermajors — a group of the U.S. and Europe-based big energy multinationals with operations that span almost every corner of the globe. Currently, SHEL has a Zacks Rank #3 (Hold).

Investors interested in the energy sector might look at some better-ranked stocks like Mach Natural Resources LP MNR, Enerflex Ltd. EFXT and Targa Resources Corp. TRGP. While Mach currently sports a Zacks Rank #1 (Strong Buy), Enerflex and Targa Resources each carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Mach Natural Resources LP is an independent upstream oil and gas company that focuses on the acquisition, development and production of oil, natural gas and natural gas liquids reserves. The Zacks Consensus Estimate for MNR’s 2024 earnings indicates 200% year-over-year growth.

Canada-based Enerflex Ltd. provides oilfield services for natural gas and petroleum producers. EFXT’s expected EPS (earnings per share) growth rate for the next quarter is 188.89%, which compares favorably with the industry loss of 22.45%.

Houston, TX-based Targa Resources Corp. is a premier energy infrastructure company and a leading provider of integrated midstream services in North America. The Zacks Consensus Estimate for TRGP’s 2024 earnings indicates 70.22% year-over-year growth.

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