Shell sees Q1 writedown of up to $800m as oil prices slump

The company on Tuesday said it had seen and expected “significant uncertainty” on prices and demand for oil and gas.

“Furthermore, recent global developments and uncertainty in oil supply have caused further volatility in commodity markets,” it added in an update.

Shell cut its 2020 oil price outlook and guided for post-tax impairment charges in the range of $400m - $800m for the first quarter.

“The impact of the dynamically evolving business environment on first quarter results is being primarily reflected in March with a relatively minor impact in the first two months,” Shell said. It added that cash flow from operations (CFFO) price sensitivity at Group level was still estimated to be $6bn a year for every $10 per barrel Brent price movement

The company also announced overnight that it would exit the Lake Charles liquefied natural gas export project in Louisiana, citing the oil price crash.

The project is a 50-50 venture with U.S. midstream company Energy Transfer, which said it would take over development.

AJ Bell investment director Russ Mould said Shell appeared determined to maintain payouts, despite other blue chip companies deciding to withhold dividends to protect their balance sheets.

“Even though Brent crude oil is stuck near 17-year lows at $27 a barrel, the oil major’s trading statement provides updates on production volumes, capacity utilisation rates and an analysis of how sensitive CFFO is to movements in the oil price – but no mention of the quarterly $0.47-a-share dividend," he said.

“Instead, Shell simply highlights how it has opened a new $12 billion credit facility with its banks. This supplements that $10 billion facility offered by its banks last December and supplements a $20 billion cash pile and additional capacity to raise short-term debt, should it be needed.

“Shell’s board therefore seems to be sending a clear message that the dividend payment is not under discussion."

The company last week announced plans to squeeze an extra $8bn - $9bn of free cash flow out of the company, by cutting costs and capital investment.

Mould said this strategy had seen Shell – and its dividend – through the 2015-16 oil price collapse and "management clearly believes it can do so again now, as the board seeks to avoid reducing its dividend for the first time in over 70 years and wade its way through a gathering oil glut".

“The risk is that oil goes lower still, as Saudi Arabia and Russia persist in maintaining supply in their efforts to deliver a crushing blow to the US shale industry which continues to chip away at their control of the commodity."

Mould said this could force Shell to borrow more heavily to maintain the dividend and while this would comfort shareholders in the near term, the longer it had to rely on capex cuts, asset disposals and debt the greater the potential long-term damage to the company’s competitive position, "especially as it still faces the issue of how to reposition itself for a lower-carbon future and invest in that transition".