Royal Dutch Shell could take a hit of up to $22bn

The oil giant has had to reassess energy prices as the oil sector continues to feel the impact of the coronavirus

Article updated: 30 June 2020 10:00am Author: Helal Miah

  • For impairment testing purposes it now assumes a lower average oil price for 2020, 2021, and 2022 of $35, $40 and $50 respectively and a long term price of $60 a barrel
  • As medium and longer term energy price assumptions have been dropped by most oil majors, it’s clear BP’s dividend policy is unsustainable
  • Recommendation: We maintain our ‘Buy’ recommendation for investors willing to accept a medium level of risk

Reassessing long term energy prices has become a common theme amongst the oil majors, and this morning it was Royal Dutch Shell’s turn in a trading update ahead of its Q2 results. For impairment testing purposes it now assumes a lower average oil price for 2020, 2021, and 2022 of $35, $40 and $50 respectively, and a long term price of $60 a barrel. Meanwhile a similar reduction of expectations has been made over natural gas prices as well. Based on these assumptions, the company expects to make impairment charges between $15bn to $22bn in its Q2 results as a greater number of assets become uneconomic.

RDSB was early in recognising the impact of the crisis on the energy market and took immediate action to cut back on costs and dividend payouts. This morning’s announcement will cement the view that dividends will take longer to get back to their pre-crisis level than originally thought. I believe that, given the circumstances, Shell is on the right and conservative path in managing its assets and capital distributions in the crisis environment.

Our view with BP somewhat differs as they raised capital to continue paying the dividend, and yesterday sold $5bn of downstream assets to Ineos in order to continue paying its dividends, according to some in the market. This strategy is fine if you believe that oil prices will only suffer in the very short term, but it’s clear that medium and longer term energy prices assumptions have been dropped by most oil majors and BP’s dividend policy is therefore unsustainable.


All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.

Helal Miah portrait photo
Helal Miah

Investment Research Analyst

After graduating with an economics degree from University College London, Helal started his career within private banking at Smith & Williamson Investment Management and later held analyst and fund manager roles with the Industrial Bank of Japan, Schroders and Mitsubishi Corporation. He is a chartered fellow of the Chartered Institute for Securities & Investment. 

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