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Shell to witness weaker margins in Q4

Ahead of its full-year results, Royal Dutch Shell is expected to post weaker margins in its refining, trading and marketing division.

The company is also expected to write down up to $2.3billion in the fourth quarter as it had been forced to shrink estimates for sector values, due to a weaker economic outlook. It would maintain spending on the lower end of forecasts amid slowing demand for oil and gas.

The Anglo-Dutch company warned in October that trade tensions between the United States and China, the world’s two largest energy consumers, could hurt demand and take a toll on its performance.

Shell, according to Reuters’ report, said it was expecting to take post-tax impairment charges in a range between $1.7billion and $2.3billion for the quarter “based on the macro outlook”. It did not say which assets the impairments relate to.

What it implies: The impairment will likely increase Shell’s debt ratio, or gearing, which the company has struggled to reduce in recent years.

This reduction in guidance and impairment appears to show that management underestimated how much weaker oil prices would be in the latter part of this year, as well as underestimating future demand for oil, along with its by-products,” said Michael Hewson, Chief Market Analyst at CMC Markets UK.

Share movement

Its shares were down 1.1% by 11.45 GMT on Friday, compared with slight gains on the broader European energy index.SXEP.

Shell, which had beaten third-quarter profit expectations on strong oil and gas trading, also warned that higher taxes would hit earnings by about $500 million to $600 million in the fourth quarter.

The company said it expected additional good write-offs in the range of $100 million to $200 million in the period, while 2019 capital expenditure was expected to be at the lower end of its guidance range of $24 billion to $29 billion.

 

Shell not alone

Since October, rivals Chevron, BP Equinor and Spain’s Repsol all wrote down a total of around $20billion, primarily in the United States shale gas assets due to lower long-term gas prices.

For instance, Chevron announced a $10 billion to $11 billion write-down on several natural gas assets and one of its oil projects in the Gulf of Mexico.

The company said that the downward revision in its long-term price outlook means that it will “reduce funding to various gas-related opportunities.”

  • The decision largely focuses on shale gas holdings in Appalachia, but also the Kitimat LNG project in Canada and other international holdings.
  • The company is exploring options including asset sales.
  • It also said its revised oil price outlook led to the impairment charge on its Big Foot project.

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