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Shell - increases expected Russian impairment charges

Shell now expects impairment charges between $4 -$5bn relating to write-downs in the value of its Russian assets...

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Shell now expects impairment charges between $4 -$5bn relating to write-downs in the value of its Russian assets, up from $3bn. This comes after Shell announced plans to exit its joint ventures with Gazprom and related entities. This will not affect underlying earnings.

Group cashflows are ''expected to be negatively impacted by very significant working capital outflows as price increases impacting inventory have led to a cash outflow of around $7 billion. Reflecting the unprecedented volatility in commodity prices''.

The shares were down 1.8% following the announcement.

View the latest Shell share price and how to deal

Our view

The move to exit from Russian joint ventures hasn't come as a total surprise, given BP's similar decision and the fact Shell has comparatively smaller exposure to Russia. From an operational perspective, the biggest impact will come from a capacity reduction from the loss of the Sakhalin project. Shell has been trying to expand its liquified natural gas portfolio, of which the Sakhalin stake played a role.

The $4-5bn of assets in Russia will be written down through impairment charges, and this is manageable. The move hasn't affected shareholder return plans (more on that later).

The bigger picture is more directly linked to the yoyoing oil price. Over the last couple of years, this has made Shell's results difficult to keep track of. However, we think the underlying trend is positive thanks to the fundamental strengths of the group's assets.

With oil trading at around $100 a barrel, these were always going to be good times for oil majors. This has allowed Shell to slice tens of billions off net debt, and funds capital expenditure as Shell invests in new gas fields as well as low carbon alternative fuels like hydrogen. Disposals have lent a hand too, with the sale of the group's Permian shale fields adding to the financial firepower supporting a new buyback programme in 2022.

Operating expenditure is creeping up again, and given the group's increased environmental commitments, this trend may continue. Shell's committed to halving emissions from operations by 2030, and that either requires significant investment in new technologies, or a further restructuring of the current business - neither of which will come cheap.

Whatever happens, Shell will remain an oil and gas giant for decades. Our greatest concern is that oil & gas groups in general risk the fate suffered by tobacco companies. With investors turning their nose up at tobacco stocks at any price, valuations in the cigarette industry have sunk to what would ordinarily be considered unsustainable lows.

We're not immediately concerned Shell will end up in the ethical waste bin. But projects to keep the group moving in the right direction risk eating into cash flows - especially as many of the newer technologies the industry is exploring are untested at a global scale.

Fortunately, Shell can afford to dabble - always assuming, of course, that the oil price doesn't catch a cold. We should flag that geopolitical concerns have increased uncertainty, and the likelihood of oil price volatility in the short to medium term should be considered carefully.

The prospective yield has come a long way, a reflection of the improved cash position. With plenty of other demands on cash though, growth might be thin on the ground and dividends are variable and not guaranteed. The price/earnings ratio is well below the long-term average, which reflects the concerns that Shell's fortunes ultimately depend on something it can't control - oil prices.

Shell key facts

All ratios are sourced from Refinitiv. 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.

First quarter trading update

Integrated Gas production is expected to be between 860k - 910k barrels of oil equivalent per day, higher than the guidance given at the fourth quarter. Liquified Natural Gas volumes are expected to be 7.7 - 8.3m tonnes. Trading and optimisation results are expected to be higher than last quarter. Renewables and Energy Solutions are expected to contribute $100 - $600m to divisional underlying earnings.

Production is expected to be between 1,900 and 2,050 thousand barrels of oil equivalent per day in Upstream. The outlook reflects the transfer of Canada Shales assets to Integrated Gas.

Oil Products and Chemical products are all expected to see trading and optimisation results either in-line with or better than last quarter.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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 disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 7th April 2022