What We've Learned From Shell Writedown, BP Divestment
By David Hodari
Royal Dutch Shell on Tuesday wrote down the value of its assets
by as much as $22 billion. Also this week, BP, which made a similar
move earlier this month, announced the $5 billion sale of its
In some respects, the moves can be seen as ripples from the
impact of the coronavirus pandemic which crashed oil markets
earlier this year. In others, the companies' decisions mark a
continuation of a broader sector trend, with investors and oil
companies asking when the world will reach 'Peak Oil.' With the
second quarter earnings season just around the corner, here's what
Oil's Covid-19 Perfect Storm
One of the major factors cited by Shell in its decision was
lower energy demand--and therefore lower oil prices--in the wake of
the seismic impact of the coronavirus. A damaging price-war between
Saudi Arabia and Russia may have combined with lockdowns and travel
bans to crash prices, but that short-term pain has intensified
pressure that had long been building on energy demand, according to
Per Magnus Nysveen, head of analysis at consultancy Rystad
"The impact of 'Peak Oil' questions, electrification, and then
Covid has added to the pressure on oil companies that did not plan
for [low] oil prices," Mr. Nysveen says, adding that "there might
be high prices after the peak in [oil] demand... but you can not
plan to have high prices."
ESG Secondary to Debt
Both majors announced plans to decarbonise before the full force
of the pandemic hit the West. Those strategic changes have "been
driven by ESG of course," says Rystad's Mr. Nysveen. Shell's and
BP's recent decisions have also been partly related to the effort
to decarbonize the energy industry, he adds, but only insofar as
recent events have weighed on oil prices and potentially hastened
the arrival of Peak Oil.
Still, BP's sale of its petrochemicals division represents an
effort to clean up the company's balance sheet rather than the
environment, says Jason Gammel, equity analyst at Jefferies.
Petrochemicals can boost a company's ESG credentials, "as you don't
burn the end product," he adds, "but BP don't have the scale in
BP's divestment, at a relatively unattractive valuation, is a
signal that the company is still grappling with a debt problem,
according to Biraj Borkhataria, co-head of European energy research
at RBC Capital Markets.
The sale could also be a gamble, he adds, saying that "you lose
earnings, you lose diversity in your earnings base, and that can
make your business more volatile."
Project Math No Longer Adds Up
BP isn't the only oil major struggling with high leveraging. The
broader oil sector is now struggling to make lower oil-price
forecasts work, given that assumptions made when commissioning
exploration and production projects can quickly change. Shell's
writedown and BP's asset sale come in that context, says
Jefferies's Mr. Gammel.
"A lot of projects were sanctioned a few years ago when oil was
averaging $100 a barrel," he says, adding that "a lot of the assets
have been built that are not making money in the current price
The International Energy Agency said in May that it expects
global oil-and-gas investment in 2020 to drop by a third. Oil
majors are engaging in some serious belt-tightening. Shell, for
example, announced its first dividend cut since the Second World
What About the U.S.?
Along with BP and Shell, Chevron has said it plans to cut jobs
amid a sharp drop-off in capital expenditure in the U.S. sector.
Chevron took a $10 billion write-down late last year and sector
peers Hess and Occidental have both recently taken large
Elsewhere in that sector, though, ExxonMobil has resisted
adjusting the value of its holdings, although it may not be able to
hold out forever, analysts say.
Expensive projects such as the one Exxon has in the Arctic have
long lead times and are no longer cost effective, says Rystad's Mr.
Nysveen. Along with expensive projects in Canada's oil sands, Exxon
"will have to reconsider those positions," he adds.
Still, large U.S. integrated oil companies came into the
coronavirus downturn with lower debt levels than European ones,
which are attempting to decarbonize more quickly, RBC's Mr.
Write to David Hodari at email@example.com
(END) Dow Jones Newswires
July 03, 2020 07:02 ET (11:02 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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