EQNR Equinor ASA

By Sarah McFarlane 

LONDON -- Royal Dutch Shell PLC joined a clutch of big oil companies that have taken big financial hits because of a global glut of oil and gas.

Shell said Friday that it would take an impairment charge of around $2 billion and warned of lower margins in its refining, chemicals and retail businesses given the weaker economic outlook.

The company didn't offer details about the posttax impairment charge, but analysts said it is likely linked to lower projections for gas prices. Shell also indicated up to $1 billion in additional charges from well write-offs, decommissioning costs and deferred tax charges.

Shell's announcement follows a write-down of more than $10 billion by Chevron Corp. earlier this month, the largest by an energy producer in years. Spain's Repsol SA, the U.K.'s BP PLC and Norway's Equinor ASA have also cut asset values in recent months.

Energy companies are grappling with one of the U.S. shale boom's unintended consequences: a global oversupply of natural gas. As a result, companies are predicting weaker-than-expected U.S. gas prices in the coming years.

Among the energy majors, Exxon Mobil Corp. and BP have the greatest exposure to U.S. gas at 12% of their production, followed by Chevron and Shell at 5%, according to RBC Capital Markets.

Doubts over future demand for oil and gas are also weighing on the sector. In the past decade, the energy industry has switched from worrying about running out of oil and gas, to predicting demand for fossil fuels will peak within 20 years as the world moves to cut carbon emissions.

The falling value of assets on big oil companies' balance sheets could push up a closely watched measure of their financial stability, and in turn affect investor returns.

Shell's announcement Friday prompted a 1% fall in the company's share price in London, potentially driving up its gearing level -- the ratio of market capitalization to debt.

"This is likely to put pressure on gearing and hence raise the risk that Shell will moderate its current pace of buybacks," said Colin Smith, an analyst at Panmure Gordon.

Some companies, including BP and Shell, link shareholder returns to gearing targets.

Shell has a gearing level of around 28% and is targeting 25%. BP has the highest gearing level among its peers at 36% including leases, but has said it is aiming to reduce the number below 30%.

Further impairments could be on the way from Exxon and BP, according to analysts.

Exxon didn't immediately respond to a request for comment.

BP Chief Financial Officer Brian Gilvary said in October that he wasn't expecting any major impairments in the company's fourth-quarter results, due Feb. 4. The expectation, he said, depended on whether the company sold more U.S. gas assets and what sale prices were in relation to their book value.

"Gearing and net debt coming down will be a strong signal in terms of [shareholder] distributions," said Mr. Gilvary.

Falling costs across the sector, partly driven by developments in technology such as predictive maintenance to extract oil and gas more efficiently, are another driver for lower oil-and-gas price assumptions, according to analysts.

Digitization has contributed $1 billion to Shell's cash flow, via cost reductions, production increases and increased customer margins, the company said at a technology event it hosted in Amsterdam in November.

"If costs are going to be coming down then a number of the companies will have to look at the oil and gas price assumptions they use," said Lydia Rainforth, an analyst at Barclays, adding that prices tend to follow costs.

According to the bank, however, energy companies' forecasts for Brent oil prices in 2025 range from $70 to $90 a barrel, higher than the current level of around $66 a barrel.

Write to Sarah McFarlane at sarah.mcfarlane@wsj.com

(END) Dow Jones Newswires

December 20, 2019 09:11 ET (14:11 GMT)

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