ii view: Shell prepares for weaker oil demand

Oil price estimates have been lowered with a business value write-down of up to $22 billion flagged.

Second-quarter outlook & longer-term oil price assumptions 

• Expects post-tax impairment charges in the range of $15 to $22 billion
• Gearing is expected to increase by up to 3% due to the impairments
• Brent oil long-term price assumption of $60 per barrel
• Oil Products sales volumes are expected to be between 3,500 and 4,500 thousand barrels per day, down from 6,435 thousand in Q4 2019

ii round-up:

Oil giant Royal Dutch Shell (LSE:RDSB) is preparing to write down the value of its business assets by up to $22 billion as Covid-19 sees it lowering its future oil & gas price expectations lower. 

The announcement also follows its April climate change initiative to become a net zero carbon company by 2050.

Second-quarter oil products sales volumes are expected be between 3,500 and 4,500 thousand barrels per day. That is down from nearly 6,500 thousand in the final quarter of 2019, before Covid-19 lockdowns and travel restrictions saw airports virtually closed and work from home initiatives substantially reducing commuting. 

Shell shares drifted marginally lower in early UK trading. Management previously estimated second-quarter product volumes that were worse than its latest estimate. 

Shares for the year-to-date are down more than 40%. Rival BP (LSE:BP.), which has also flagged second quarter business value write-downs of up to $17.5 billion, has seen its shares fall by around 30% in 2020. BP previously decided to marginally increase its dividend payment, Shell announced its first cut since the Second World War.

Shell reduced its estimate for the oil price in 2021 and 2022 from $60 a barrel to $40 and $50 respectively, given expected lower demand. Its long-term estimate stands at $60 per barrel. 

The profit margin from oil refining going forward is now forecast to be 30% lower. Group gearing or borrowing is expected to rise by 3% given the planned impairments. It stood at 28.9% as of the first quarter 2020, up from 26.5% in early 2019. 

Second-quarter results are scheduled to be announced on 30 July 2020. 

ii view:

Formed in 1907, energy company Shell operates in over 70 countries and employs over 80,000 staff. The business includes upstream, exploration & extraction, and downstream refining operations. It also includes integrated gas – largely the former British Gas liquefied natural gas (LNG) business.

2020 has been a hugely difficult year for the Anglo-Dutch oil giant. The oil price has suffered as Saudi Arabia and Russia failed to agree on supply cuts and Covid-19 savaged demand. The pandemic and lifestyle changes under population lockdowns have also potentially speeded up climate change requirements outlined by governments at the 2015 United Nations conference in Paris. As such, Shell is now looking to refocus its business much quicker than expected. 

For investors, the prior decision to cut the dividend proved a major blow. A lower level of shareholder returns is now considered appropriate in the new world of potentially lower oil demand following Covid-19. Second-quarter business value write-downs also offer more short-term pain. But Shell has taken swift and tough decisions to conserve cash under Covid-19, and to try and prepare for expected lower oil demand in its wake and in the shadow of required lower carbon climate change consumption. For now, and still offering a dividend yield of around 4%, Shell’s position as a core portfolio constituent looks likely to remain.  

Positives: 

• Rebased but sustainable dividend payment
• Previous purchase of BG Group improved both its product diversity & climate change credentials

Negatives:

• Demand for oil & gas is now expected to be lower
• Subject to factors outside of its control such as geopolitical tensions

The average rating of stock market analysts:

Buy