Asset write-downs keep coming from the world’s largest oil-and-gas companies. They are not cash expenses, but they do underline how the risks and rewards of investing in the supermajors have deteriorated.
Royal Dutch Shell said Tuesday that it would make impairments of up to $22 billion in its second-quarter results to reflect lower oil and gas prices and refining margins. Its London-listed peer BP estimated an up to $17.5 billion hit earlier this month for the same reason.
At the start of 2020, the industry had long-term expectations of $75 to $90 a barrel of crude. Even before the pandemic, that looked too optimistic, and Chevron announced an $10 billion-$11 billion write-down last December. The sector is now adjusting those price expectations. Energy consultants at Wood Mackenzie expect “further large impairments.”
“Just a few years ago, few within the oil-and-gas industry would even countenance ideas of climate risk, peak demand, stranded assets, liquidation business models and so on. Today, companies are building strategies around these ideas,” said Luke Parker, vice president of corporate analysis at Wood Mackenzie.
Lower prices and dividend cuts—actual and expected—have reduced investors’ prospective returns as risks are increasing. The outlook for demand has rarely looked less certain. The unpredictability of the downturn and subsequent recovery adds to pre-existing concerns that governments’ decarbonization promises may leave higher-cost assets “stranded” or uneconomic.
The wave of write-downs raises the companies’ leverage levels, as measured by debt to assets. But the numbers are still small relative to their total petroleum assets: At the upper end of the estimates, Shell’s was about 9% of its net property, plant and equipment assets, BP’s was 13% and Chevron’s 7%. Long-term oil prices are tricky to predict, but more impairments may be necessary. Shell still expects crude to sell at $60 a barrel for 2023 and beyond. The Brent benchmark currently stands at about $41 and traded as low as $15 this year.
The industry has slashed its capital spending in response to plunging prices, but the International Energy Agency still expects it to spend nearly half a trillion dollars this year, some of it to keep current wells producing and the rest to find or develop new reserves. That is a lot of money and write-downs point to the possibility that some of it will be wasted.
Big oil stocks are already very cheap, particularly in Europe, where investors are taking climate-related risks more seriously. Shell’s stock shed another 3% Tuesday to trade a third below book value—the lowest in at least two decades. Given the prospect that shareholder capital won’t be put to good use, though, this signals risk more than opportunity.
Shell still expects crude oil to sell at $60 a barrel for 2023 and beyond.
Photo: Luke Sharrett/Bloomberg NewsWrite to Rochelle Toplensky at rochelle.toplensky@wsj.com
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No End in Sight for Big Oil’s Write-Downs - The Wall Street Journal
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