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Shell slashes valuation of oil and gas assets amid coronavirus crisis

Shell slashes valuation of oil and gas assets amid coronavirus crisis

By Mark Williamson: 1st JULY 2020

The company said yesterday it expected to cut the valuation of its integrated gas business by $8 – $9 billion, “primarily in Australia”. It said this would include a partial impairment of the giant Prelude floating liquefied natural gas facility.

ROYAL Dutch Shell has said it plans to slash the valuation of its oil and gas assets by up to $22 billion (£17.9bn) to reflect the expected impact of the Covid-19 coronavirus pandemic on demand and the wider economy.

The Anglo-Dutch giant, which is a significant player in the North Sea, has also cut its oil and gas price assumptions for coming years.

The changes reflect the recognition that the fallout from the coronavirus will have a lasting impact on the global economy and the fundamentals of the energy market.

The company appears to see little prospect of a significant recovery in the market even when lockdown measures that were introduced to slow the spread of the coronavirus are eased.

“Given the impact of Covid-19 and the ongoing challenging commodity price environment, Shell continues to adapt to ensure the business remains resilient,” said the company yesterday.

The company made the move weeks after BP said it would cut the valuation of its assets by up to $17.5 billion and reduced its oil price assumptions.

Oil and gas consultancy Wood Mackenzie said other firms were likely to follow suit following the slump in commodity prices triggered by the coronavirus.

“The impairment Shell has announced is about more than an accounting technicality, or an adjustment to near-term price assumptions. It’s about fundamental change hitting the entire oil and gas sector,” said Luke Parker, vice president, corporate analysis at Wood Mackenzie.

The fall in commodity prices this year has compounded the challenges oil and gas companies face amid pressure on them to do more to help tackle the threat posed by climate change.

Shell announced in April that it aimed to become a net zero company in terms of carbon emissions by 2050.

In May the company announced the first cut in its dividend since the Second World War as it looked to conserve cash to allow it to invest in growth.

Chief executive Ben van Beurden said then the company’s business plans had not yet been adapted to reflect the net zero ambition.

In a second quarter update issued yesterday Shell said it had revised its 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”.

The company said it expected to record impairment charges totalling $15bn to $22bn after tax following a review that covered a significant portion of oil and gas businesses.

The company said it expected to cut the valuation of the upstream exploration and production business by $4bn to $6bn, mainly in respect of operations in Brazil and in the North American shale fields.

Shell gave no indication of whether it had cut the valuation of its UK North Sea business.

Following the company’s first quarter results announcement in May chief financial officer Jessica Uhl described the North Sea as an important part of the company’s portfolio. She said in more normal circumstances Shell would be investing further in the area.

The company said yesterday it expected to cut the valuation of its integrated gas business by $8 – $9 billion, “primarily in Australia”. It said this would include a partial impairment of the giant Prelude floating liquefied natural gas facility.

The company expects to cut the valuation of its refining and oil products business by up to $7bn.

Shell now assumes the Brent crude price will average $35 per barrel in 2020 compared with $60/bbl previously.

The company noted the amount of free cash flow it generates falls by around $6bn annually for every $10 movement in the average price of a barrel of Brent crude.

It assumes the price will rise to average $40/bbl in 2021 and $50/bbl in 2022, down from an average $60/bbl in both years.Shell still assumes the price will average $60/bbl over the long term.

Brent crude sold for around $41/bbl yesterday, compared with about $70/bbl in January.

Shell has cut its assumption for gas prices for the years 2020 to 2022 but left its long term forecast unchanged.

SOURCE

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