Shell to write down up to $22bn as virus hits big oil
Royal Dutch Shell Plc will write down between $15 billion and $22 billion in the second quarter, giving investors a wider glimpse of just how severely the coronavirus crisis has hit Big Oil.
In the second quarter 2020, Shell has revised its mid and long-term price and refining margin outlook reflecting the expected effects of the COVID-19 pandemic and related macroeconomic as well as energy market demand and supply fundamentals. This has resulted in the review of a significant portion of Shell’s Upstream, Integrated Gas and Refining tangible and intangible assets.
The Refining asset valuation updates reflect Shell’s strategy to reshape and focus its refining portfolio to support the decarbonization of its energy product mix, leveraging assets and value chains in key markets.
The Upstream and Integrated Gas asset valuation updates, including of related exploration and evaluation assets, are largely driven by the change in long-term prices with some impacts due to a changed view on the development attractiveness. A revision in the decommissioning and restoration provision discount rate assumption from 3 percent to 1.75 percent, reflecting a lower interest rate environment, has impacted the asset values tested for impairment.
The following price and margin outlook have been assumed for impairment testing:
Brent : $ 35/ bbl ( 2020), $ 40/ bbl ( 2021), $ 50/ bbl (2022), $60/bbl (2023) and long-term $60 (real terms 2020)
Henry Hub: $1.75/MMBtu (2020), $2.5/MMBTU (2021 and 2022), 2.75/ MMBTU (2023) and long-term $3.0/ MMBTU (real terms 2020)
Average long-term refining margins revised downwards by around 30ercent from previous mid cycle downstream assumption
Based on these reviews, aggregate post-tax impairment charges in the range of $15 to $22 billion are expected in the second quarter. Impairment charges are reported as identified items and no cash impact is expected in the second quarter. Indicative breakdown per segment is as follows:
Integrated Gas $8 – $9 billion, primarily in Australia including a partial impairment of the QGC and Prelude asset values
Upstream $4 – $6 billion, largely in Brazil and North America Shales
Oil Products $3 – $7 billion across the refining portfolio
These impairments are expected to have a pre-tax impact in the range of $20 to $27 billion. The Goodwill intangible assets were assessed and no impairment charge on Goodwill is expected to be recorded in the second quarter
Impairment calculations are being progressed: the range and timing of the recognition of impairments in the second quarter are uncertain and assessments are currently on going
The revised outlook for commodity prices and refining margins could impact overall deferred tax positions, which will be reviewed after the finalisation of the operating plan later in 2020
Gearing is expected to increase by up to 3percent due to the impairments. Additional impacts to reported gearing levels are expected due to pensions revaluations associated with the current interest rate environment along with other usual quarterly movements
As per previous disclosures, CFFO price sensitivity at Shell Group level is still estimated to be $6 billion per annum for each $10 per barrel Brent price movement
Note that this price sensitivity is indicative, is most applicable to smaller price changes than those in the current environment and in relation to the full-year results. This excludes shortterm impacts from working capital movements and costof-sales adjustments.