Shell flags $15-$22 billion Q2 impairments

The Hague-based giant Shell issued an update on its second-quarter outlook, flagging impairments in the range of $15 to $22 billion.

Shell’s Integrated Gas business expects $8 – $9 billion impairment charges in the quarter, primarily in Australia including a partial impairment of the QGC and Prelude asset values.

Upstream business flags $4 – $6 billion impairment, largely in Brazil and North America Shales, while Oil Products business is expecting $3 – $7 billion impairment charges across the refining portfolio.

These impairments are expected to have a pre-tax impact in the range of $20 to $27 billion.

The Goodwill intangible assets were assessed and no impairment charge on Goodwill is expected to be recorded in the second quarter Impairment calculations are being progressed: the range and timing of the recognition of impairments in the second quarter are uncertain and assessments are currently ongoing, Shell said.

The revised outlook for commodity prices and refining margins could impact overall deferred tax positions, which will be reviewed after the finalization of the operating plan later in 2020.

Shell noted its Integrated Gas business is expecting production to be between 880,000 and 910,000 barrels of oil equivalent.

LNG liquefaction volumes are expected to be between 8.1 and 8.5 million tonnes.

Additional well write-offs in the range of $250 to $350 million are expected compared with the second quarter of 2019.

As previously communicated, more than 90 per cent of Shell’s term contracts for LNG sales in 2019 were oil price linked with a price-lag of typically 3-6 months. Consequently, the impact of lower oil prices on LNG margins became more prominent from June onwards, the company said in the update.

Shell’s Upstream production is expected to be between 2.3 and 2.4 million barrels of oil equivalent per day.

Although this production range is higher compared with the outlook previously provided, it has had a limited impact on earnings in the current macro environment, Shell said.

As previously communicated, cash flow from operations is expected to be negatively impacted by the Lula unitisation settlement in Brazil of around $500 million, for which the earnings impact was recognized in the third quarter of 2018.

While earnings are expected to show a loss, cash flow from operations is not expected to reflect equivalent cash tax receipts due to the build-up of deferred tax positions in a number of countries. Additionally, due to phasing impacts, tax payments are expected in the second quarter.

In the second quarter of 2020, Shell has revised its mid and long-term 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.

This has resulted in the review of a significant portion of its Upstream, Integrated Gas and Refining tangible and intangible assets.

The Refining asset valuation updates reflect Shell’s strategy to reshape and focus its refining portfolio to support the decarbonization of its energy product mix, leveraging assets and value chains in key markets.

The Upstream and Integrated Gas asset valuation updates, including of related exploration and evaluation assets, are largely driven by the change in long-term prices with some impacts due to a changed view on development attractiveness.

A revision in the decommissioning and restoration provision discount rate assumption from 3 per cent to 1.75 per cent, reflecting a lower interest rate environment, has impacted the asset values tested for impairment.

For impairment testing, Shell assumed Brent price and margin outlook of $35/bbl (2020), $40/bbl (2021), $50/bbl (2022), $60/bbl (2023) and long-term $60 (real terms 2020).

Shell also took Henry Hub price and margin outlook at $1.75/MMBtu (2020), $2.5/MMBtu (2021 and 2022), 2.75/MMBtu (2023) and long-term $3.0/MMBtu (real terms 2020) into consideration.

Average long-term refining margins revised downwards by around 30 per cent from previous midcycle downstream assumption.

Based on these reviews, aggregate post-tax impairment charges in the range of $15 to $22 billion are expected in the second quarter.

Impairment charges are reported as identified items and no cash impact is expected in the second quarter.

Gearing is expected to increase by up to 3 per cent due to the impairments. Additional impacts to reported gearing levels are expected due to pensions revaluations associated with the current interest rate environment along with other usual quarterly movements.
As per previous disclosures, cash flow from operations price sensitivity a Shell Group level is still estimated to be $6 billion per annum for each $10 per barrel Brent price movement.