Shell’s traders ride to the rescue but its writedowns tell the real story
Oil major’s storage capacity helped it through volatility, but its future profitability took a hit, finds Ed Clowes
Shell has managed to narrowly avoid a stinging quarterly loss with the help of a trading unit that was able to exploit the violent swings in oil prices to turn a huge profit.
Chaos in the energy markets, triggered by the virus, has broadly been bad for oil supermajors like Shell. But it has been good for their trading divisions.
The London-listed oil giant scraped a meagre profit yesterday, posting adjusted profits of $600m (£453m) in the second quarter, down more than 82pc from $3.5bn a year ago. Analysts had predicted that the company would fall to its first quarterly loss in more than a decade, but instead Shell’s trading business came to its rescue, capitalising on the volatility of recent months. Profits from Shell’s refining and trading division soared to $1.5bn, nearly 30 times higher than they were in 2019, despite refinery earnings falling by 25pc.
Wild swings in the price of oil, which fell briefly to less than $1 a barrel in April, allowed Shell’s giant trading team – the largest in the world – to place bets on future crude prices and rake in massive profits.
The Anglo-Dutch group also took advantage of its storage capacity, snapping up oil at bargain rates and then selling it on later once the price had recovered again.
The fact that Shell’s trading division took lemons and made lemonade was not lost on chief executive Ben van Beurden. “We do contango on steroids,” he said, referring to the practice of buying oil when it is cheap and storing it until it is expensive again. “This quarter, trading shows what a unique capability it is,” he added.
Many of Shell’s smaller divisions ultimately performed well despite the difficult trading conditions. Lower costs helped its chemicals business to a $164m profit, while the marketing division made $900m.
However, the headline figures only tell part of the whole story. While Shell did post a $600m profit according to its underlying figures – numbers that analysts watch closely for an indication of Shell’s true performance – these results excluded almost $17bn of writedowns on the group’s assets. Including them means a loss of $18.4bn on a current cost of supplies basis.
Companies sometimes slash the value of their assets if material changes mean facilities such as an oil refinery is guaranteed to make less money for the business in its lifetime. In Shell’s case, it has lowered the price it expects oil to sell for in the coming years – a factor that will undoubtedly hit how much money the company can make.
Shell said the impairment came “as a result of revised medium and longterm price and refining margin outlook assumptions in response to the Covid-19 pandemic and macroeconomic conditions, as well as energy market demand and supply fundamentals”.
The division at Shell responsible for extracting the oil shouldered a large portion of these writedowns. The company’s upstream division lost $6.7bn as a result of writedowns on assets in Nigeria, Brazil and Europe.
Indeed, these impairment charges tell the real story of Shell’s performance this year.
Oil companies are at an inflection point, wrestling with the idea of a world without oil – an idea that once seemed fanciful.
The virus has sent prices tumbling while crushing demand, at a time when polluting companies are already under ever-increasing scrutiny.
Shell has recognised this and has pledged to become the world’s biggest power company, focusing primarily on natural gas and renewable energy. The company also reacted to the pandemic by cutting its dividend for the first time since the Second World War.
Shell is betting on the growth of electric vehicles and smart homes, and on customers who demand that their electricity is generated by renewable sources such as solar and wind power.
“All of these technologies and solutions exist, but offering all of these things as a package doesn’t,” says Tom Heggarty, a solar analyst at consultant Wood Mackenzie.
“There are not many companies with the balance sheet that would make all the investments that you need to do that, and that seems to be the way that Shell is going.”
With Shell’s share price dropping almost 6pc yesterday following the release of its financial results, investors are seemingly unimpressed by the company’s situation. The key issue now is when, if ever, oil demand recovers. Acknowledging this existential threat, Van Beurden said: “Demand will take a long time to recover if it recovers at all. The aviation sector is down and will remain down for some time to come.”
‘We do contango on steroids. This quarter, trading shows what a unique capability it is’