Shell to write down assets by up to $22bn after review

Shell said it planned to write down the value of its assets by up to $22bn after lowering its outlook for oil and gas prices amid the Covid-19 pandemic.

The move comes after a climate-focused review of its operation in which it unveiled plans to reduce greenhouse gas emissions to net zero by 2050.

A post-tax impairment charge of $15bn - $22bn was expected in the second quarter on a non cash basis, the Anglo-Dutch company said on Tuesday. Pre-tax profits would be hit by $20bn - $27bn after commodity prices were hit by coronavirus and the Saudi-Russian price war while gearing was expected to increase by up to 3%.

Shell cut its forecast Brent crude oil price for 2020 to $35 a barrel, down from $60. For 2021 and 2022 it cut its forecast to $40 and $50 respectively, also down from $60. Production was expected to be between 2,300 and 2,400 thousand barrels of oil equivalent per day, the company added.

Sector rival BP has already taken $17.5bn off the value of its assets as it also prepared to shift to a low-carbon future.

DEMAND SLUMP SLAMS PRICES

Shell said oil products sales volumes were expected to be between 3,500 - 4,500 thousand barrels per day, "driven by a significant drop in demand related to the impact of COVID-19".

“Although this production range is higher compared with the outlook previously provided, it has had a limited impact on earnings in the current macro environment."

Lower oil price impacts would become "more prominent" from June at Shell's integrated gas operations as more than 90% of term contracts for LNG sales in 2019 were oil price linked with a price-lag of typically three-to-six months.

The company also cut its long-term refining profit margin outlook by 30% and its long-term natural gas price was set at $3 per million British Thermal Units.

AJ Bell investment director Russ Mould said the coronavirus had moved from being a "short-term headache ... to a long-lasting migraine" for Shell.

“The scale of the write-downs to the value of its assets are eye-catching and reflect the significant drop in energy prices linked to the pandemic, though of perhaps more concern is the ongoing impact on its integrated natural gas business.

“A big part of Shell’s strategy in the 2010s was built around increasing its exposure to gas and it was the key driver behind the mega-merger with BG in 2016."

“This has given it substantial exposure to the liquefied natural gas (LNG) market and the typical three to six month lag in LNG prices responding to the oil price means the company is only just beginning to feel the pain here."

“Continuing spikes in infections and the possibility of a Covid-19 second wave mean any recovery in demand is likely to be patchy."

Hargreaves Lansdown analyst Nicholas Hyett said: "The real question going forwards is whether Shell’s fairly downbeat expectations are downbeat enough. Oil prices have spent a large part of the last five years under $60 a barrel and while the collapse of several large US shale names might reduce global supply, the outlook for demand is hardly robust.”