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Shell is experiencing an annus horribilis

Translation of an article published today by the Dutch FT, the FD Het Financieele Dagblad 2020)

Shell has to pay for its openness

Carel Grol

In Brief

  • All oil companies are hit by the low oil price.
  • Nevertheless, American companies perform better than European companies, with Shell as the largest descender.
  • One explanation is that Shell makes more predictions, and is therefore punished more harshly. American companies say less, so they can count on less.

Shell is experiencing an annus horribilis. The oil and gas company’s share price has halved this year. The oil price has suffered from the massive drop in demand due to corona and disagreement between Saudi Arabia and Russia over the reduction of oil production. Shell wrote off billions and cut the dividend for the first time since World War II. But remarkably, the American oil majors are doing much better in the exact same market.

Although ‘less bad’ is more appropriate. The Shell share lost 52% this year. BP’s share price fell by 43% in London. And in Paris, Total is at a minus of 38% this year. In the US, ExxonMobil and Chevron are standard-bearers of the oil and gas industry. ExxonMobil is at a 40% loss this year, Chevron at -30%.

Shell is dropping faster than the rest
Price of oil companies, indexed (31 Dec ’19 = 100)


So Chevron is the relative winner, while Shell has had the hardest hit. Hundreds of billions of stock market values ​​have evaporated across the board. Oil and gas is a global market, and these companies operate from Australia to Switzerland, with these types of oil majors almost forming a state in themselves. Their budgets are larger than many African countries, their CEOs sit at the table with world leaders and the companies speak their own English oil jargon. Then why is Shell the laggard?

Possibly because the British-Dutch group is relatively ‘open’. That sounds counterintuitive for a company that employs dozens of press officers worldwide for difficult questions and is difficult to understand for outsiders. But Shell, for example, publishes a forecast about the oil price. A company is judged on such an outlook. If oil prices are lower than expected, a company must write off: that’s what Shell and BP have done.

Leading consulting firm Wood Mackenzie called Shell’s write-off in late June “more than an accounting aspect.” “These are fundamental changes affecting the entire oil and gas sector.”


Of course, American oil majors are also struggling with these fundamental changes. Only they usually say less. They don’t publish their oil price estimates, so proverbial dots are missing on the horizon. Investors therefore remain more in the dark. “US companies generally report little more than necessary,” said Thijs Berkelder, ABN Amro analyst who follows Shell.

Shell made a $ 18 billion write-off on its assets last week, which was announced a month earlier. BP released $ 17.5 billion in June. Chevron posted a $ 10bn write-off late last year, mainly on shale gas, but has barely written off due to the sharp drop in oil and gas prices this year.


Depreciation depends on a laundry list of variables. “What discount rate does a company use, what are the estimates for the future CO2 price, does a company value only the proven oil and gas reserves or also the probable reserves, et cetera, et cetera,” says Berkelder. His conclusion: a company can actually go in any direction, as long as the accountant and the SEC approve it.

That is the US stock exchange regulator. BP and Shell are also listed in the US, so the SEC is also involved. That these European companies will announce their write-offs in the middle of the year, “that’s to be praised,” says the ABN analyst. “Usually, this type of write-off is not communicated until the end of the year.” He expects the depreciation of the US oil majors later this year.


They are under increasing pressure to also provide more information to investors. Major US pension funds want Chevron and ExxonMobil to also disclose their oil price forecasts. Shell expects an average of $ 35 a barrel for this year, and an average of $ 50 in two years. The outside world does not know what the Americans use for their assumptions.

Whether the companies also bow to the pressure from their shareholders is open to question. In Europe, up to the European Commission, serious work has been done on ‘Integrated reporting’: jargon for non-financial information that is included in annual reports.


But a US survey published last year found that the US is lagging behind in this form of financial reporting. The research was not about oil companies, but focused on companies that all voluntarily complied with Integrated reporting. The researchers pointed more to the ‘rules are rules’ approach to American companies and to the legalization of society in the US. In other words, if a company can be taken to court by a wrong forecast, especially when it is non-financial, why would such a company give another prediction?


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