Capital Markets | Impairment

Shell Expects Impairment Charge of Up to $22 Billion for Q2

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Shell has reported an update on several matters, including announcing an expected impairment charge related to several assets.

$15-22 Billion Impairment Charge Expected in Q2

The company expects post-tax impairment charges in the range of $15 to $22 billion in Q2 2020.

Breakdown per segment is as follows:

• Integrated Gas $8 – $9 billion, primarily in Australia including a partial impairment of the QGC and Prelude asset values

• Upstream $4 – $6 billion, largely in Brazil and North America Shales

• Oil Products $3 – $7 billion across the refining portfolio

These impairments are expected to have a pre-tax impact in the range of $20 to $27 billion.

Price Margin Outlook:

• The following price and margin outlook have been assumed for impairment testing:
  • Brent: $35/bbl (2020), $40/bbl (2021), $50/bbl (2022), $60/bbl (2023) and long-term $60 (real terms 2020)
  • Henry Hub: $1.75/MMBtu (2020), $2.5/MMBtu (2021 and 2022), 2.75/MMBtu (2023) and long-term $3.0/MMBtu (real terms 2020)
  • Average long-term refining margins revised downwards by around 30% from previous midcycle downstream assumption

Other Updates

• Production is expected to be between 880 and 910 thousand barrels of oil equivalent per day
• LNG liquefaction volumes are expected to be between 8.1 and 8.5 million tonnes
• Additional well write-offs in the range of $250 to $350 million are expected compared with the second quarter 2019. No cash impact is expected in the second quarter
• Deferred tax charges are expected to have a negative impact on earnings in the range of $100 to $200 million. No cash impact is expected in the second quarter
• Trading and optimisation results are expected to be below average
• As previously communicated, more than 90% of our term contracts for LNG sales in 2019 were oil price linked with a price-lag of typically 3-6 months. Consequently, the impact of lower oil prices on LNG margins became more prominent from June onwards
• CFFO in Integrated Gas can be impacted by margining resulting from movements in the forward commodity curves. Margining inflows are not expected to be significantly different from those received in the first quarter 2020

• Production is expected to be between 2,300 and 2,400 thousand barrels of oil equivalent per day. Although this production range is higher compared with the outlook previously provided, it has had a limited impact on earnings in the current macro environment
• Updates related to receivables and inventory provisions are expected to have a negative earnings impact in the range of $200 to $400 million compared with the second quarter 2019. No cash impact is expected in the second quarter
• As previously communicated, CFFO is expected to be negatively impacted by the Lula unitisation settlement in Brazil of around $500 million, for which the earnings impact was recognised in the third quarter 2018
• While earnings are expected to show a loss, CFFO is not expected to reflect equivalent cash tax receipts due to the build-up of deferred tax positions in a number of countries. Additionally, due to phasing impacts, tax payments are expected in the second quarter

• Corporate segment earnings excluding identified items are expected to be a net expense at the lower end of the $800 to $875 million range for the second quarter. This excludes the impact of currency exchange rate effects
• CFFO is expected to be impacted by a working capital outflow in respect of margining and settlement of operational foreign exchange instruments.