The oil giant has had to reassess energy prices as the oil sector continues to feel the impact of the coronavirus
Royal Dutch Shell could take a hit of up to $22bn
- 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.
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