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It is very doubtful that Shell has just naively taken on the responsibility and losses associated with taking on the customer base of several failed energy supply companies, without there being a trade-off, direction or negotiation with Government. The terms of this will be highly politically sensitive and I would guess not in the public arena for some time yet. We have a Government that claims to understand industry and commerce, they were looking for a favour, and they fully understand that they cannot expect any company to take on losses without some form of compensation.
Don't forget that customers who have to switch through their supplier going bust, do not keep their contract tariff. They are placed on a new contract, with a new tariff, with the new company. These new customers will basically be going onto Shell's lowest variable tariff, which is likely to be far higher than what they had before (bust companies were not hedged). The worst scenario for Shell in this situation is that they might be making a loss on some of these new customers, but it will be far lower than the loss being made by the previous company.
Shell cut the dividend, reduced debt and weathered the storm during 2020. It's a totally different environment now with higher oil /gas prices and more positive sentiment. The free cash flow of Shell over the next 2 quarters is going to be off the graph. With a special dividend likely to be announced, and a higher regular dividend, plus with debt being paid down further with these bumper profits, this can only translate into higher SP over the next few months.
At the moment every additional domestic gas & electricity customer is going to lose SHell Energy money....I don't know how it is financed but presumably the parent company will have to subsidise this loss. It is an expensive way to get critical mass, I'm fairly certain there won't be any other suppliers who will want these extra customers at the moment. Somehow gas price has to drop and the standard variable tariff has to match wholesale energy prices to give suppliers at least a small profit or they will exit the market....apart from Shell of course which has unlimited resources apparently!!!
Looks like 2.5m customers for Octopus and 5m for Ovo, so Shell might be taking on further tranches of customers. In terms of seeking a profitability goal, presumably the more customers, the nearer they will get to what they perceive as the necessary critical mass.
Any idea how many energy customers we now have?
My estimate is around 1.5m.
If 1.5m is about right this puts us on a par with the likes of Octopus and Ovo and gives us around a 5% share of the market.
Good strategy?
It is never going to be a big earner, but if we can turn a small profit and keep supplying "100% renewable energy" the brownie points earned are worth the hassle.
These acquisitions enhance Shell's vertical integration of businesses & companies. They have saved the Government serious embarassment over the collapse of so many companies in the energy supply sector. Essentially they have won a lot of brownie points for pulling the Government's/Boris's nuts out of the fire!
They are taking on these companies strategically (& behind the smoke and mirrors), because the failures have been spread around a number of major players - British Gas etc, reliable, dependable, deep-pocketed compoanies. The Government can still argue that they have introduced competition to the energy supply companies. The Zombie companies are being shaken out! If the Government did not want this consolidation & restructuring in the market-place, they could simply lift the Cap!
Much is made of these doomed companies being loss-making, but they are unlikely to remain so. However Shell might take them on anyway as part of a social responsibility charade, that distracts from their demonised mainstream products. As a side benefit these acquisitions arguably help many of the disadvantaged in society. Also a zero cost per customer acquisition is a pretty sound strategy, especially if and when those customers become profitable propositions! Plenty of new faces to sell sister products to. Shell
From Shell's perspective they are outlaying peanuts which accrue lots of benefits! Will it impact on decisions relating to Windfall Taxes - you bet!
I can only assume Shell picked up these UK gas supply companies for a good price so why did they not buy more?
Shell are moving to become a major supplier of energy in the UK. Today another firms customers come to us.
They seem to be the only company willing to take on new customers at the moment. Given every one of them increases their losses even more its not suprising.
However the energy market will get fixed and then this could prove to be a quite brilliant strategy especially with the Green Energy future.....
Any thoughts ??
Green Energy
Colerado Energy Ltd
Daligas Ltd
Pure planet Ltd
GOTO Energy