Oil giant Shell expects $22 billion asset write-down in second quarter

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Oil prices

Although oil prices have witnessed a major recovery over the past couple of months, energy companies around the world are still in a tight situation. During this time, many small-to-mid-sized producers have ended up going out of business, while other well-known names have seen their shares tumble as global oil demand remains quite weak. One of the largest energy companies in the world, Royal Dutch Shell (NYSE: RDS.A), announced recently that it expects to end up writing off as much as $22 billion, mainly from overpriced assets.

With the market for oil being in such a weak state right now, companies have struggled to justify asset prices on their balance sheets. Shell went on to say on Tuesday that it expects to report a post-tax asset write-down between $15 billion to as much as $22 billion in the second quarter. The company went on to say between weak oil prices and the expected effects of the coronavirus pandemic; it’s going to be difficult for the company to operate this year without reporting some losses.

Given the impact of COVID-19 and the ongoing challenging commodity price environment, Shell continues to adapt to ensure the business remains resilient. In light of this, Shell is announcing today a revised long-term commodity price and margin outlook, which is expected to result in non-cash impairments in the second quarter results,” read an official second quarter update from Shell. “Based on these reviews, aggregate post-tax impairment charges in the range of $15 to $22 billion are expected in the second quarter.

Shell had announced earlier this year that it would be cutting its dividend by 2/3rds in response to this coronavirus pandemic and its impact on the company’s bottom line. With travel and tourism remaining at a low level, demand for energy commodities is projected to remain weak for quite some time.

Shares of Shell fell by around 3 percent in after-hours trading following the news, with the stock poised to fall a fair bit more once trading starts again. A $20 billion-plus write-down is a pretty big deal considering that Shell’s market valuation is around $110 billion. Over the past few months, shares of Shell have plummeted significantly, falling from around $60 to around half that price at the moment. While Shell definitely has the cash to survive this year, it will likely be a long time before even major oil companies are in a financially healthy position.

Royal Dutch Shell Company Profile

Royal Dutch Shell is an integrated oil and gas company that explores for, produces, and refines oil around the world. In 2018, it produced 1.9 million barrels of liquids and 11.2 billion cubic feet of natural gas per day. At year-end 2018, reserves stood at 11.4 billion barrels of oil equivalent (including 1.3 billion for equity companies), 37% of which consisted of liquids. Its production and reserves are in Europe, Asia, Oceania, Africa, and North and South America. The company operates refineries with capacity of 2.9 mmbd located in the Americas, Asia, Africa, and Europe and sells 18 mtpa of chemicals. Its largest chemical plants, often integrated with its local refineries, are in Central Europe, China, Singapore, and North America. – Warrior Trading News

 

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