Oil giant Royal Dutch Shell on Thursday reported a sharp drop in net profit for the three months through to the end of June, following an unprecedented period of energy market turmoil and significantly weaker oil and gas prices.
The Anglo-Dutch company reported adjusted earnings of $638 million for the second quarter of 2020. That compared with net profit of $3.5 billion over the same period a year earlier and $2.9 billion in the first three months of 2020.
Net income attributable to shareholders on a current cost of supplies (CCS) basis and excluding identified items, which is used as a proxy for net profit, came in at a loss of $18.4 billion for the second quarter. This followed an impairment charge of $16.8 billion post-tax over the same period, given the oil major now anticipates significantly lower oil and gas prices over the next 30 years.
Shell had previously warned it could incur aggregate post-tax impairment charges in the range of $15 billion to $22 billion over the three-month period.
“It is, of course, a non-cash measure and it is reflective of how we see the environment going forward but yes, in the sense that we needed to do a review of our balance sheet, we are done,” Ben van Beurden, CEO of Royal Dutch Shell, told CNBC’s “Squawk Box Europe” on Thursday.
“But, of course, we are not done yet with the pandemic so we will have to see what the coming quarters and years will bring us,” he added.
Shares of Shell dipped almost 2% during mid-morning deals.
‘May still be more pain to come’
Analysts had warned that “Big Oil” companies, referring to the world’s largest energy majors, were likely to report “horrendous” second-quarter results as coronavirus lockdown measures coincided with an unparalleled demand shock.
“Inevitably, the biggest talking point in this morning’s results from Royal Dutch Shell is the huge loss the company has incurred — largely as a result of revised pricing,” Stuart Lamont, investment manager at Brewin Dolphin, told CNBC via email.
“The pandemic’s influence is likely to remain far-reaching, with Shell saying it may still need to curtail or reduce production later in the year to mitigate lack of demand — an indication that there may still be more pain to come,” Lamont continued.
Shell explained its second-quarter reflected weaker-than-expected commodity prices and lower realized refining margins, oil products sales volumes, and higher wells write-offs when compared to the same period last year.
However, this was partly offset by “very strong crude and oil products trading and optimisation results as well as lower operating expenses.”
“If you look at the quarter, we had, actually, a pretty credible quarter. So, of course, the $16.8 billion of impairments stands out but that is a special effect. If you look at $600 million earnings or, more importantly, the $6.5 billion of cash flow, that shows that actually the company has a lot of operational strength,” Shell’s van Beurden told CNBC on Thursday.
“So, in that sense, I am very pleased that we have weathered what was probably the most difficult quarter in living memory very well.”
Shell’s CEO said the company was “learning a lot of new tricks quite quickly” when it comes to simplifying the company, before adding the firm was looking at ways to reposition itself given the energy transition was likely to “come at us even faster” as a result of the Covid-19 pandemic.
In a note to shareholders on June 30, Shell said it expected Brent crude futures to average $35 a barrel in 2020, down from a previous forecast of $60 for the international benchmark.
The company also lowered its Brent price forecast to $40 in 2021 and $50 in 2022, having previously said it expected prices to average $60 for each respective year.
This relatively gloomy outlook for commodity prices through to 2050 followed the firm’s decision to cut its dividend to shareholders for the first time since World War II in the first quarter of the year.
Brent crude futures traded at $43.11 a barrel on Thursday morning, around 1.4% lower, while U.S. West Texas Intermediate futures stood at $40.60, down 1.6%.