Shell Earnings Signal a Tough Friday Ahead for US Oil Giants

Royal Dutch Shell PLC (NYSE: RDS-A) reported second-quarter 2020 results before markets opened Thursday. The oil and gas supermajor reported adjusted diluted earnings per share (EPS) of $0.06 on revenues of $32.5 billion. In the same period a year ago, Shell reported EPS of $0.84 on revenue of $61.0 billion. Second-quarter results also compare to consensus estimates for a loss per share of $0.26 and $64.24 billion in revenue.

Shell announced in late June that it would be taking a noncash, pretax impairment charge of $20 billion to $27 billion as a result of the effects of the COVID-19 pandemic. The actual amount reported was $22.3 billion ($16.8 billion after-tax).

By segment, Shell wrote down $11.2 billion (pretax) in the value of its integrated gas, primarily in Australia; $6.3 billion in upstream assets primarily in North American shale, a project in Nigeria, and offshore assets in the Gulf of Mexico, Brazil and Europe; $4.9 billion in oil products (refining), primarily in Europe and North America; and $9 million in its corporate segment.

On an after-tax basis, Shell reported a net loss of $18.1 billion in the quarter, including the $16.8 billion in noncash impairments. Lower realized prices, refining margins and sales margins most of the remaining damage.

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Adjusted earnings totaled $638 million compared to $3.5 billion in the second quarter of last year and $2.9 billion in the first quarter of this year.

Net debt increased by $4.4 billion to $77.8 billion sequentially, and free cash flow totaled negative $300 million, compared with $6.2 billion in positive free cash flow in the year-ago quarter.

Shell’s massive impairment charge raises the question of whether Exxon Mobil Corp. (NYSE: XOM | XOM Price Prediction) also will take a significant charge when the U.S. supermajor reports second-quarter results Friday. Exxon has not written down the value on any of its assets so far this year, and some experts believe the company should long ago have taken a write-down on a large chunk of its $31 billion acquisition of natural gas producer XTO Energy in 2010.

The other U.S. supermajor, Chevron Corp. (NYSE: CVX) took a $10.4 billion noncash impairment charge in the fourth quarter of 2019. BP PLC (NYSE: BP) has said it expects to write down up to $17.5 billion in assets when it reports results next week, and Hess Corp. (NYSE: HES) took an impairment charge of $2.25 billion in the first quarter. Occidental Petroleum Corp. (NYSE: OXY) has warned of a write-down totaling up to $9 billion for the second quarter.

Shell did not provide earnings or revenue guidance, but analysts forecast third-quarter EPS at $0.01 and revenues at $64.2 billion. For the full fiscal year, the consensus estimate calls for EPS of $0.93 and revenue of $259.3 billion. In 2019, Shell reported EPS of $4.08 and revenue of $344.9 billion.

Shell’s stock traded down about 2.7% in Thursday’s premarket session, at $31.55 in a 52-week range of $21.26 to $61.17. The consensus price target on the stock is $40.37. Shell’s dividend yield is 3.95%.

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