Shell Swings to Historic Loss as Pandemic Devastates Oil Demand

By Sarah McFarlane 

Royal Dutch Shell PLC swung to its first quarterly loss since its formation over a decade ago and warned that the outlook for oil-and-gas demand continued to be uncertain, illustrating the scale of damage Covid-19 is wreaking on the industry.

The pandemic has decimated demand for oil, hitting prices hard. When around two-thirds of the world's population was in lockdown in early April, global oil demand fell by a third, according to the International Energy Agency.

That led Shell to report Thursday a second-quarter loss on a net current-cost-of-supplies basis -- a figure similar to the net income that U.S. oil companies report -- of $18.4 billion. That compares to a profit of $3 billion in the comparable period last year and is the company's first loss since the unification of Royal Dutch Petroleum and Shell Transport and Trading in 2005.

The Anglo-Dutch company's performance was partly hit by it writing down the value of its assets by $22 billion before tax, as flagged in June, reflecting expectations of lower energy prices.

About half the charge was attributed to its gas business -- mainly its Australian liquefied natural gas projects. It also wrote down the value of two shale assets in North America and offshore assets in Brazil, Europe, Nigeria and the Gulf of Mexico.

Shell warned that the uncertain outlook for oil and gas demand could curtail its production in the third quarter, as well as activity at its refineries and chemicals plants. It also said its LNG business would suffer a greater impact from lower oil prices in the third quarter because of the time lag for price moves reaching oil-linked LNG contracts.

Benchmark Brent oil prices averaged $29.60 a barrel between April and June, down 57% from the comparable period a year earlier. Brent traded at $43.78 a barrel Thursday.

French energy company Total SA also reported a quarterly loss Thursday, but said it would maintain its dividend. Its earnings came a day after it wrote down the value of its assets by $8.1 billion because of lower oil price expectations. Still, Total said that while its European gas stations saw a 30% fall in demand for petroleum products in the quarter, by June it had rebounded to 90% of precrisis levels.

Both Shell and Total noted the strength of their trading activities, which can make money even when energy prices are lower by taking advantage of price volatility.

The two European companies are the first of the five major oil companies to detail the damage the pandemic has inflicted during the second quarter.

U.S. giants Exxon Mobil Corp. and Chevron Corp. are expected to report quarterly losses Friday, with Exxon warning recently that it faced steep losses in its refining and production businesses.

Oil companies have taken swift action to shore up their finances since coronavirus struck, including cutting costs and reducing staff. Shell has been among the most aggressive, deciding in April to cut its dividend for the first time since World War II to avoid having to borrow to fund it.

Exxon and Chevron have said they are committed to not cutting dividends, but have taken on more debt this year. Analysts expect BP PLC to cut its payout to shareholders when it reports earnings Tuesday.

Shell said Thursday that its gearing level -- net debt as a percentage of total capital -- rose to around 33%, above the company's target of 25%. In April Shell's gearing was 29%. Higher gearing can raise the cost of borrowing for a company.

Shell's shares were down 0.5% in early trading Thursday.

Christopher M. Matthews

contributed to this article.

Write to Sarah McFarlane at [e-mail]

(END) Dow Jones Newswires

July 30, 2020 05:08 ET (09:08 GMT)

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