Shell Boosts Power Market Presence With First Utility Buyout

In a bid to lower its carbon footprint, Royal Dutch Shell, plc RDS.A recently inked a deal to acquire UK’s energy supplier First Utility. The move will enable Shell to expand its energy supply business from commercial and industrial customers and venture into the residential sector. The purchase price of the transaction has been kept under wraps. Subject to regulatory approvals and satisfactory closing conditions, the deal is set for completion by the end of the first quarter of 2018.

First Utility is the largest supplier of gas and electricity in UK — after the Big Six energy providers — serving around 825,000 residential customers. First Utility signed a trading-partnership pact with Shell in 2013 to bolster growth and develop innovative products. In 2015, First Utility inked a licensing agreement with Shell to operate in the German household energy sector under Shell's brand.

The announcement of the acquisition comes amid a challenging time for UK’s energy firms as the British Prime Minister Theresa May plans to cap electricity and gas bills until 2020 which could dampen competition. Since 2012, new energy suppliers have increased competition in the space, lowering the Big Six’s market share from nearly 100% to about 80%. The latest acquisition deal will further intensify the competition putting more pressure on the Big Six. The move will mark Shell’s entry to Britain's household energy market, enabling the company to develop innovative new services for customers.

First Utility will operate as a stand-alone entity and subsidiary of Shell within its New Energies division in which the company will invest approximately $1 billion per year till 2020 to shift its focus on cleaner and renewable energy sources. The new business will serve as a hedge for reduced gasoline and diesel fuel demand. The transaction is one of the latest in Shell’s acquisition spree — after collaborating with IONITY and New Motion — as it attempts to diversify its portfolio beyond oil and gas.  Various other biggies including TOTAL S.A. TOT, BP plc, Chevron Corporation ExxonMobil Corporation, have started to reorient and restrategize to adapt to the changing times.  They have started making efforts to decarbonize the energy system with gradual shift to alternative fuels to sustain their business models if the demand for fossil fuels starts waning in the coming decades.

Headquartered in Netherlands, Shell is one of the largest integrated energy companies engaged in production, refining, distribution and marketing of oil and natural gas. The company currently carries a Zacks Rank #3 (Hold).

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A few better-ranked players in the same industry are Statoil ASA STO and PetroChina Company Limited PTR. Both these companies carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Statoil delivered a positive earnings surprise of 13.64% in the last quarter.

PetroChina delivered an average positive earnings surprise of 27.44% in the trailing four quarters.

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