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No-Surprise Write-Down, BP/RDSA stable at +20

30 June 2020 by jbchevrel

The Anglo-Dutch oil major group Royal Dutch Shell (RDSA) will slash up to $22b from the value of its assets as they warned COVID will give a lasting blow to demand for energy globally. As BP did ($17.5b). RDSA cut its oil and gas price outlook today. As BP did. RDSA said that as a result of the lower prices, it would record post-tax charges in the range of $15b - $22b in Q2. The post tax impairments will increase its gearing by +3%. Operationally speaking, all divisions ex Chemicals achieved production at the upper end of what had been guided in May. Earlier this month, BP had announced it would reduce the value of its oil and gas assets by $17.5B. That also reflected BP management’s view that essentially oil and gas prices will remain lower for longer. Here RDSA revised down its own price outlooks for impairment testing to $35/bbl in 2020, $40/bbl in 2021, $50/bbl in 2022 and $60/bbl in 2023 for the long term. RDSA 5y CDS (68) feels even more bullet proof than BP (88), especially after the historic RDSA dividend cut. They cut it for the 1st time since WW2. Payout cut by a tad more than 2/3 (to 16c per share from 47c). That saves them c$10b annually. Back then, that was clearly presented as being part of a lasting “reset” of RDSA dividend policy, as opposed to a short-term quick-to-reverse measure. Before that, RDSA was the biggest dividend payer in FTSE in 2019, so a big change in strategy to protect RDSA balance sheet. Pre-COVID, RDSA 5y CDS was 27 (2/21) peak close 191 (3/18) now 68 after rallying to 47. RDSA will release Q2 #s on July 30. In Q1, RDSA net income adjusted for cost of supply (their preferred profit measure) dropped to $2.9b. This compared with $5.3b in Q119. Analysts had $2.3b. Back then already, RDSA said the situation would be “more severe” in Q2, with oil prices at the start of the year likely to be a “high point” for 2020. The message had been clearly telegraphed back then, explaining partly why today is no surprise. For reference, Brent was around $24 when dividend was cut, now $41, year high $68. RDSA CEO said “We do not expect a recovery in oil prices or demand for our products in the medium term.” Energy consumption worldwide could drop -6% in 2020, according to the IEA, equivalent to India’s total annual demand. The outlook for crude is quite uncertain, the US held a record-high level of commercial crude oil inventories as of the week to June 19, EIA data showed Monday. EIA reported a +1.4mb increase in crude oil inventories for the week to June 19 to 540.7mb, above the 5y average for this time of the year, while demand rebound is fading as in some states, part of the re-opening measures are being rolled back. On BP side, the sale of petrochemicals business to INEOS has been agreed for $5b, with $400m to be initially received as a deposit, $3.6b on completion which is scheduled for the end of 2020 and the final $1b to be paid in instalments by the end of June 2021. BP will have completed its total $15b disposal program 1y head of schedule. Another step forward in bringing debt down, although the future of BP dividend isn’t surely going to be the same as RDSA. BP will release Q2 #s on August 4. The 1:1 RV BP/RDSA is +20 vs a range [+10,+75] COVID to date.