The Royal Dutch Shell share price has slid by over 2% this morning after the energy giant warned it will join rival and London-listed peer BP in booking a massive impairment charge. Like BP, Shell has said it has also now downwardly revised its mid and long-term oil price outlook. The result is that it will accept impairment charges of up to $22 billion on the paper value of its assets.
Like BP, Shell points to a changed environment for the oil and gas market resulting from “the expected effects of the Covid-19 pandemic and related macroeconomic as well as energy market demand and supply fundamentals”.
Existing, producing assets are expected to make significantly less money than presumed just a few months ago. Expensively acquired new discoveries may well also be abandoned for the foreseeable future as economically unviable at the now forecast oil and gas prices for coming years.
Shell’s Brent crude price forecasts are now for an average price per barrel of just $35 this year, rising to $40 in 2021, $50 in 2022 and $60 from 2023 onwards. Prices are expressed in real terms as of 2022 and don’t take inflation into account.
The forecasts Shell is replacing estimated a barrel of Brent crude at $60 from 2020 onwards. The company’s forward price guidance for Henry Hub gas has also been slashed by around a third for 2020. Expected refining margins have also been revised down by about 30%.
Royal Dutch Shell is not only the biggest company by market capitalisation listed on the London Stock Exchange – it is Europe’s largest company. Popular with investors as a secure dividend cash-cow, in April Shell announced it was cutting its dividend for the first time since the Second World War. At the time it cautioned it would take several years for oil and gas prices to recover from the coronavirus hit to energy demand.
Today’s announcement on the $15 billion to $22 billion of impairment charges to be booked in the company’s second quarter results came alongside a trading update ahead of them being published in July. Shell informed investors oil and fuel product sales have fallen to the equivalent of 3.5 to 4.5 million barrels a day, compared to 6.6 million barrels a day over the same three months last year.
Breaking down the expected impairment charges, $8 billion to $9 billion will be written off the value of assets held by Shell’s integrated gas division that includes liquified natural gas (LNG) assets. The company’s Prelude project in Australia, a huge floating LNG hub, is the largest in the world. It also owns a major LNG development in Queensland, expensively acquired through the takeover of BG Group in 2016.
Another $4 billion to $6 billion will be written off the value of Shell’s upstream oil and gas production division. Projects are concentrated in Brazil and North America Shales. Many of these projects may not be economically viable while depressed oil prices last.
Finally, $3 billion to $7 billion of impairments will be taken on Shell’s refining assets. That move is believed to be part of the company’s strategy towards reducing the net carbon footprint of its energy product mix.
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