July 30, 2020 / 2:48 PM / 8 days ago

Breakingviews - Weakened Shell offers dim hope for pre-virus glory

Filled oil drums are seen at Royal Dutch Shell Plc's lubricants blending plant in the town of Torzhok, north-west of Tver, November 7, 2014.

LONDON (Reuters Breakingviews) - Oil majors may be past the worst of the coronavirus-induced crash, but the recovery is likely to be long and arduous. Royal Dutch Shell, Chief Executive Ben van Beurden on Thursday said the $122 billion company’s sales fell by nearly two-thirds in the second quarter, as crude prices collapsed during lockdowns. The pandemic will leave a legacy of rising debt, diminished investment and uncertain demand. Juicy investor payouts are the natural sacrifice.  

Shell’s results were better than expected. Van Beurden had already prepared investors for bad news, having slashed the group’s quarterly dividend from 47 cents to 16 cents in April, and warning that he would need to write down assets by as much as $22 billion. Yet the group still managed to eke out a $638 million adjusted operating profit. Volatility in the oil markets allowed Shell’s traders to make gains of $1.5 billion, up over 2700% compared to the same period last year.   

The pandemic leaves Shell with a $78 billion net debt pile, as the impairment eroded the value of its assets. The group’s debt to assets ratio has jumped to nearly 33%, a long way off its previous target of around 25%. If it doesn’t manage to get the debt to a more manageable 28% of assets, it could lose its prized AA credit rating, which would drive its borrowing costs up. That makes it unlikely the dividend will be fully restored any time soon.  

Van Beurden is pulling every lever. Besides the dividend, he is also slashing investment. Reduced capital expenditure in oil fields and the chemicals business helped to bring down the overall spend by a third in the three months ending in June, to $3.4 billion. Capex for the year as a whole is likely to be $5 billion less than last year’s $23 billion.     

Cutting investment today may not matter much if the oil price recovers quickly. Indeed, Shell expects crude to reach $60 a barrel by 2023. It can already cover its costs if the black stuff stays above $30 a barrel. Yet that speedy recovery may prove optimistic, as consumers, incentivised by governments, turn away from fossil fuels. And, in order to compete, Shell may have to plough more money into renewable energy sources. Shareholders are likely to rank low down in the list of priorities.  


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