Shell Swings to Historic Loss as Pandemic Devastates Oil Demand -- 2nd Update

By Sarah McFarlane 

Royal Dutch Shell PLC swung to a heavy loss in the second quarter 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 on Thursday to report 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 with a profit of $3 billion in the same period last year and is the company's first loss since the modern-day Shell was formed by the unification of Royal Dutch Petroleum and Shell Transport and Trading in 2005. Until then, the two companies were partners but reported financial results separately.

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.

"There remains continued significant uncertainty in terms of how the pandemic will play out, we're seeing a lot of starting and stopping around the world, that impacts our assets, our supply chains," said Jessica Uhl, Shell's chief financial officer.

The company is restructuring to become simpler, leaner and more focused, Ms. Uhl said, without elaborating on whether this could result in Shell selling any businesses. Efforts to reduce costs include a voluntary redundancy program, although the company didn't say how many roles could be cut. Shell employs around 83,000 people.

"A major overhaul is required, working out what's core and noncore, in the context of whether they want to be in all markets or exit some businesses," said Christyan Malek, an analyst at JP Morgan.

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. Ms. Uhl said it was one of Shell's best trading performances on record.

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.

The company said that as its earnings recover it would look to increase dividends, expand investment to enable growth and reduce debt.

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.

Both 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's shares traded down 2.7% Thursday.

Christopher M. Matthews

contributed to this article.

Write to Sarah McFarlane at [e-mail]

(END) Dow Jones Newswires

July 30, 2020 10:50 ET (14:50 GMT)

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