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Shell Q1 write-down could be ‘harbinger’ of pain to come for oil majors

Royal Dutch Shell PLC may have plans to mitigate the current oil price collapse, but analysts said the supermajor and its peers should prepare for a bumpy ride for the rest of the year as the coronavirus pandemic wrecks havoc on the global economy and oil demand.

The Anglo-Dutch major’s March 31 announcement that it will write-down as much as $800 million in the first quarter may be a sign of things to come for integrated oil and gas companies as they navigate what analysts said will likely be a much more challenging market environment in the second quarter.

“It’s hardly surprising, and probably a harbinger of not only more such announcements from other companies but much worse news in the second quarter,” Michael Lynch, president of Strategic Energy and Economic Research, said in a March 31 email.

Global crude oil prices continue to test multiyear lows, and the increasingly likely lower-for-longer price scenario is already forcing most integrated majors to begin preserving cash and protecting their bottom lines from the fallout.

“The lower oil price, combined with the long-awaited move away from hydrocarbons as a prime source of fuel, leaves oil firms facing the risk of further asset value impairment and reopens the debate over whether some productive assets will become stranded assets,” AJ Bell investment director Russ Mould said in a March 31 email.

Even before the price collapse, Shell, along with many of its peers, announced a wave of write-offs in the last three months of 2019 due to already-weak commodity prices and even softer margins. Shell took a one-time charge of more than $2 billion in the fourth quarter of 2019 against unconventional upstream oil and natural gas assets in the U.S. and Australia.

Shell is trying to adapt to the market shocks caused by the coronavirus, first announcing March 23 that it would slash 2020 capital spending by at least $5 billion, to $20 billion; trim operating costs by as much as $4 billion; and halt the next tranche of its $25 billion share repurchase program. This was followed by its disclosure March 30 that it will walk away from the proposed Lake Charles LNG project in Louisiana.

Shell’s defensive strategies come as no surprise. Even before the current oil price rout, in January, Shell said it would slow the pace of its share buybacks after weak energy prices and margins sliced fourth-quarter 2019 earnings by almost 50% on the year.

The company also continues to improve its solvency, indicating March 31 that it added a new $12 billion revolving credit line commitment, ramping total available liquidity to more than $40 billion.

Still, some analysts are worried that despite all of its strategies and cost-cutting measures, majors such as Shell will not be able to pay dividends in the long term without additional heavy borrowing if oil prices continue to crumble.

“While that would bring succor to shareholders in the near term, the longer Shell has 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,” Mould said.

Investors have been pushing for large energy companies around the world to reduce emissions and take more serious action on climate change. Many oil companies, particularly those in Europe such as Shell, have responded as they work to diversify and decarbonize their portfolios by turning to natural gas, electricity and renewables to meet self-imposed emissions reductions goals.

“The more write-downs Shell is obliged to take, the more questions it may face about its plans to reinvent itself for the future, when hydrocarbons play a less important role in society, and how it plans to fund that reinvention if it continues to hand out such large sums in dividends and share buybacks to its investors,” Mould said.
Source: spglobal

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