Shell Takes $22 Billion Write-Down, Expecting Lower Oil and Gas Prices – WSJ

Written by Sarah McFarlane

LONDON—Royal Dutch Shell PLC is writing down the value of its assets by up to $22 billion because of lower energy prices following the demand-sapping coronavirus pandemic.

The write-down follows one by BP PLC on a similar scale earlier this month. Lower oil and gas prices brought on by the pandemic and uncertainty over the pace of the transition to lower-carbon energy have caused major oil companies to question the value of their reserves. Exxon Mobil Corp. has resisted pressure from accountants to write down its assets.

The reassessment of asset values by two of the energy sector’s biggest companies is about more than a response to the pandemic and its impact on oil and gas prices, said Luke Parker, vice president, corporate analysis at consulting firm Wood Mackenzie. The actions signal that large amounts of oil and gas are likely to be left in the ground.

“It’s about fundamental change hitting the entire oil and gas sector,” Mr. Parker said. “Within this write down, Shell is giving us a message about stranded assets, just like BP did a few weeks ago.”

Energy companies’ earnings are under pressure with oil prices having fallen by a third since the start of the year. Shell’s write-down comes as the industry cuts costs and reins in investments in the face of the health crisis, which has curbed global demand for crude oil by nearly a third in April, according to International Energy Agency estimates.

In addition, companies including Shell, BP and Chevron Corp. are reducing their workforces.

In April, Shell cut its dividend for the first time since World War II, upending investors’ expectations that major oil companies would provide reliable dividends.

On Tuesday, Shell’s shares traded down 3.2%. Shell’s largest write-downs come from its gas business, where it faces a charge of up to $9 billion, including reductions to the value of the Prelude and Queensland Curtis liquefied natural gas projects in Australia.

The write-down of the Prelude LNG project—the world’s largest floating LNG facility—is driven by factors including cost overruns and a slower startup than what was planned, said Daniel Toleman, analyst at consulting firm Wood Mackenzie. The project shipped its first LNG cargo a year ago following delays and Shell said production has been halted since February.

“With the low oil price and low LNG price I think Shell is choosing to take its time to get that project right,” said Mr. Toleman.

Shell said Tuesday that its gearing level—net debt as a percentage of total capital—is expected to rise by up to 3% because of lower asset values. In April, Shell’s gearing was 29%, above the company’s target of 25%.

Higher gearing can raise the cost of borrowing for companies but ratings agency Moody’s Corp. said in a statement that Shell’s impairments don’t change its view on the company’s creditworthiness “because they will not directly impact Shell’s cash flow generation.”

Shell expects benchmark Brent oil prices to average $35 a barrel this year and $60 a barrel in the long term.

“Following the dividend cut, we think Shell, even in the current environment, will deleverage quickly, and this should open the door for greater distributions to shareholders,” said Biraj Borkhataria, co-head of European energy research at RBC Capital Markets.

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By Jessica Yap-Chung
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