As per media releases, Raízen – a joint venture (JV) of Royal Dutch Shell plc (RDS.A) in Brazil – has decided to invest nearly $1 billion for eight ethanol plants over the coming 10 years. Shell is the largest oil company in Europe.
The massive investment reflects Shell’s intention to enhance its biofuel output in Brazil – world’s biggest ethanol producer − by 50% within 2024.
Last week, the company has already completed the construction of one plant – with yearly production capacity of roughly 40 million liters − out of the eight ethanol plants. Upon completion of the remaining seven plants, Shell JV will be able to produce roughly 1 billion liters of biofuel annually. All the plants will use sugarcane waste as input for producing cellulosic ethanol fuel.
Most Brazilian ethanol producers have been struggling with their respective profits, which are presently in the breakeven level, implying that each firm’s total profit is zero. On top of that, it is expensive to produce second generation cellulosic fuel in comparison to other conventional methods of producing ethanol.
But still the Shell JV is spending a significant amount for the project as they believe that demand for biofuel is on the rise worldwide. Moreover, once the enzymes used as input in the plants become widely available, the costs will gradually come down.
Shell is a globally integrated oil and gas company. With operations all over the world, it is involved in various activities related to oil and natural gas, chemicals, power generation, renewable energy resources, and other energy-related businesses.
With crude prices tumbling 30% since June, Shell’s upstream division has been able to extract lesser value for its products. This has put pressure on the group’s profit margins. Moreover, with crude price predicted to remain low over the coming months, the company’s exploration and production business will be hampered.
As a result, Shell currently carries a Zacks Rank #5 (Strong Sell), indicating that it will substantially underperform the broader U.S. equity market over the next one to three months.
Meanwhile one can consider better-ranked players in the energy sector like Spectra Energy Partners, LP (SEP), SandRidge Mississippian Trust I (SDT) and Seadrill Partners LLC (SDLP). All these stocks sport a Zacks Rank #1 (Strong Buy).
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