Shell Takes $16.8B Impairment

July 30, 2020

Shell Logo / Image by Alexandr Blinov - AdobeStock
Shell Logo / Image by Alexandr Blinov - AdobeStock

Royal Dutch Shell avoided its first quarterly loss in recent history, helped by a booming trading business, but announced nearly $17 billion in impairment charges reflecting a pessimistic outlook for oil and gas prices.

Shell had warned last month it was set to slash the value of its oil and gas assets by up to $22 billion as the coronavirus crisis hollowed out energy demand.

"Shell has delivered resilient cash flow in a remarkably challenging environment," CEO Ben van Beurden said in a statement on Thursday.

The Anglo-Dutch company warned, however, of the continued impact of the pandemic on oil and natural gas prices and sales in the third quarter.

Shell and its peers have historically weathered downturns thanks to their large refining operations, whose profit margins are boosted by lower crude oil prices and stronger fuel demand.

But in this crisis, the drop in oil and gas prices was coupled with an unprecedented drop in global demand.

Shell has responded by cutting its dividend for the first time since World War Two and cutting planned spending by $5 billion to a maximum of $20 billion this year.

It booked an overall impairment charge of $16.8 billion in the quarter after lowering its short-term oil and gas price outlook in the wake of the epidemic. The charge is at the lower end of its previous guidance.

Shell's shares were up 0.2% in early trading.

TRADING SURGES

Restrictions on movement globally to limit the spread of the coronavirus have knocked energy demand, with benchmark Brent oil prices falling below $30 a barrel in the second quarter, down by more than half from a year earlier.

Shell's adjusted earnings in the second quarter, which exclude special items and are adjusted to cost of supply, fell to $600 million from $3.5 billion a year ago, beating analysts forecasts of a $674 million loss.

The earnings "reflected very strong contributions from crude and oil products trading and optimisation as well as lower operating expenses", Shell said.

Refining and trading operations earnings jumped to $1.5 billion, nearly 30 times higher than a year earlier, even as refinery crude oil processing rates fell by a quarter.

Shell is also the world's largest oil and gas trader. High volatility in oil prices throughout the quarter allowed nimble traders to make large profits by betting on price movements and storing fuel to sell them at higher prices in the future.

Shell, the world's largest retailer with over 40,000 petrol stations, also saw a 39% drop in fuel sales, it said.

WRITEDOWNS

Shell's oil and gas production division, or upstream, made a loss of $6.7 billion as production declined by 7% from a year earlier to 2.415 million barrels of oil equivalent per day.

The upstream loss included a post-tax impairment charge of $4.7 billion mainly related to unconventional shale assets in North America, assets offshore in Brazil and Europe, and the OPL 245 block in Nigeria which is at the heart of a bribery court case in Italy.

Shell's liquefied natural gas (LNG) sales declined by 7% in the quarter. The Integrated Gas division wrote down $8.2 billion, mainly related to the Queensland Curtis LNG and Prelude floating LNG operations in Australia.

Shell's net debt rose to $77.8 billion and its debt-to-equity ratio, or gearing, was up by 2.8% to 32.7% following the impairments.

Shell also plans to announce a major restructuring by the end of the year.

(Reporting by Ron Bousso and Shadia Nasralla; Editing by Jason Neely and Pravin Char)



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