SHEL Shell Plc

By Sarah McFarlane 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (January 31, 2020).

LONDON -- Royal Dutch Shell PLC said it could ratchet up divestments as it reported a sharp drop in profit for 2019.

The company slowed the pace of spending on share buybacks, fueling doubts that it would meet its goal of completing the $25 billion program this year, and cut the value of its U.S. Appalachia assets amid low natural gas prices.

"All macroeconomic indicators are working against us," said Shell's Chief Executive Ben van Beurden on Thursday.

Shell and many of its energy-sector peers have suffered from lower commodity prices and weaker refining and chemical margins in the past year, with weaker results making it more difficult for some companies to keep up their returns to shareholders.

U.S. energy giants Exxon Mobil Corp. and Chevron Corp. are set to report results on Friday.

The difficult market conditions are challenging Shell's plans to transform itself into a lower-carbon business as governments focus on tackling climate change by supporting new technologies such as electric vehicles and renewable energy.

Shell said its investments in 2020 would be at the low end of the range it had targeted of $24 billion to $29 billion. The company confirmed that this would mean spending on energy projects such as wind and solar power would also be at the low end of the previous guidance of between $1 billion and $2 billion.

The company has spent $2.3 billion on so-called new energies since 2017 and at its management day in June last year set out ambitions to incrementally increase its spending in this area.

"The weak macro backdrop is not conducive to Shell being able to decarbonize unless they can reduce their debt," said Christyan Malek, head of oil-and-gas research for Europe, the Middle East and Africa at JPMorgan. "This places a strong emphasis on their oil and gas business which is critical to funding its transformation."

Shell plans to divest $10 billion in assets in the 2019 to 2020 period and has already achieved around half of that, but Mr. Van Beurden said the company was working on deals that could amount to about $13 billion for the period.

"How that pans out depends a little bit on the pace at which we can close deals, and we will be driven by an economic rationale, rather than a desire to have early cash," he said.

Shell divested around $30 billion of assets in the 2016 to 2018 period, after its $50 billion acquisition of BG Group.

That deal also saw Shell commit to a $25 billion share buyback program that started in July 2018 and has reached $15 billion so far. The company plans to cut spending on the program to $1 billion in the period to April 27 from $2.75 billion for the three months ended Jan. 27.

Biraj Borkhataria, co-head of European energy research at RBC Capital Markets, said Shell was unlikely to reach the $25 billion target by the end of 2020, and mid-2021 was a more realistic time frame.

The company's shares were down 3.7% in European trading on Thursday.

The decision to slow the pace of spending on buying back shares came after Shell's gearing level -- its net debt as a percentage of total capital -- rose to 29% in the fourth quarter, above the company's target of 25% and the 28% level reported for the third quarter. Gearing levels are one of the measures used by credit credit-rating firms to assess the risk a company faces. Lenders and investors tend to perceive a gearing level below 25% as low risk.

Ratings agency Moody's lead analyst for Shell, Sven Reinke, said that even with Shell's weak fourth-quarter results the company "remains solidly positioned with no immediate negative rating pressure."

Shell confirmed a $2.24 billion impairment charge, mainly because a global oversupply of natural gas has weighed on U.S. prices. This follows billions of dollars of cuts to asset values since October by companies including Chevron, Spain's Repsol SA, the U.K.'s BP PLC, and Norway's Equinor ASA.

--Adriano Marchese in Barcelona contributed to this article.

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

(END) Dow Jones Newswires

January 31, 2020 02:47 ET (07:47 GMT)

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