Royal Dutch Shell's total second quarter revenue was $32.5bn, down from $90.5bn in 2019. Despite total costs falling from $86.9bn to $56.4bn, the group suffered a net loss after taxes of $18.1bn. This included a $16.8bn pre-tax impairment charge as the value of some assets were written down to reflect new long term price and margin forecasts. Organic free cash flow was negative $254m during the quarter.
Shell declared a dividend of $0.16 per share, down from $0.47 last year.
The shares fell 2.7% following the announcement.
The recent collapse in oil prices sent a shockwave through the oil industry. It started with a massive surge in Saudi Arabian supply, when the production agreement between Russia and oil cartel OPEC broke down. But the challenges have now shifted into demand too as the coronavirus outbreak sees economies grind to a halt and fuel use fall.
Oil majors like Shell are better placed than smaller rivals, but this is still cripplingly bad news for profits. Underscoring the severity of the situation, management felt the need to cut the dividend for the first time since WWII. The language of a "reset" indicates that this may be a permanent reduction and not a temporary measure.
There's nothing Shell can do to influence the price of oil though. Just as the crash came out of the blue, predicting the path of a recovery is likely to be equally thankless. While Shell reckons $60 a barrel as a long term average, the price has been below that for much of the last 5 years.
It's no surprise then that Shell is taking a hatchet to the cost base. Aside from cutting the dividend the group is on track to take around $3-4bn off operating costs over 12 months and 20% off planned capital investment. Despite those efforts impairments to asset values are pushing up gearing in the short term and could mean that keeping the balance sheet in good health requires further asset sales.
In the long run the cash freed up may, if oil prices recover, help the group transition away from fossil fuels. We think this is probably a long way off though, and relies upon a profitable core oil & gas business for funding.
Shell certainly faces a tough few months, if not longer. The group's resources are immense but not infinite, and it needs higher oil prices before it can get back onto the front foot. While we think demand for oil will strengthen again once the world economy recovers from COVID-19, how long that takes and what scars Shell is left with remain to be seen.
Shell key facts
- Price/Book ratio: 0.7
- Ten year average Price/Book ratio: 1.2
- Prospective yield: 5.5%
We've introduced this section in response to recent survey feedback.
Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
Second Quarter Results
Total production fell 6% to 3.4m barrels of oil equivalent per day (boepd).
Integrated Gas underlying profits fell 79% to $362m, largely because of lower realised prices and a $403m charge for well write offs. Production fell 2% thanks to increased maintenance in Australia and lower demand, partially offset by the transfer of some activities from Upstream.
Upstream underlying profits fell from$1.3bn in the second quarter of 2019 to a $1.5bn loss in the same quarter this year. The loss primarily reflects lower realised prices. Production fell 7% which management attributed to a "challenging macroeconomic environment", including OPEC restrictions and COVID-19.
The Oil Products division made $2.4bn in underling profits, an increase of 89% on last year. The increase reflects strength in crude and oil products trading and lower costs, partially offset by lower refining margins and lower marketing sales volumes.
Underlying Chemicals profits rose 56% to $206m, reflecting lower costs partially offset by lower realised margins. Corporate costs fell from $806m to $796m, reflecting lower interest costs that were largely offset by currency movements and reduced tax credits.
Cash capital expenditure during the quarter fell 32% to just under $3.6bn, and gearing (net debt as a percentage of total capital) rose from 28.9% at the end of the first quarter to 32.7% at the end of the second.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.