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

The Daily Telegraph - Business - - Business -

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’

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