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Shell Foresees LNG Market Rebounding From Coronavirus Lows

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Shell Foresees LNG Market Rebounding From Coronavirus Lows

Shell & LNG

Shell became the largest LNG producer in the world following the acquisition of BG Group Plc in 2016, which boosted its portfolio of supply contracts and stakes in LNG plants around the world. In fact, in the recently-released quarterly report, Shell’s earnings per ADS of 74 cents outperformed the Zacks Consensus Estimate of 51 cents on higher LNG sales volumes.

Coronavirus Hurts LNG Volumes

Over the past few months, the oil and gas industry has been in shambles, thanks to the coronavirus pandemic that shook most sectors until now. Global fuel demand is visibly dented in the aftermath of large-scale travel bans imposed globally. As a result, the outlook for all the industries in the energy sector business is downbeat.

Volumes flowing to LNG export plants dropped to multi-month lows due to weak international demand associated with the coronavirus-imposed lockdowns. Moreover, increasing downward pressure on European and Asian gas prices made American fuel less competitive, lowering LNG demand in the process.

Shell’s Response

In response to the bearish oil environment, in March, Shell announced plans to trim its 2020 capital expense by a minimum of $5 billion from the past projection of $25 billion along with material reductions in working capital. It further aims to cut operating costs by $3-$4 billion over the next 12 months. These capex measures are anticipated to enhance Shell’s free cash flow generation to $8-$9 billion on a pre-tax basis.

Apart from the cost cuts, Shell suspended its $25-billion share buyback program to weather the current oil price woes. This integrated energy player maintains its asset divestment plans for 2019-20 at worth $10 billion. Execution of the same is subject to certain market conditions.

Company Upbeat on LNG Rebound

Despite the economic plight, this world’s largest liquefied natural gas trader forecasts long-term global LNG demand to gradually improve in 2021 and 2022 with the most predicted to rise from Asia, led by China and India after 2021 even as the impact of the coronavirus remains.

However, per the International Energy Agency (IEA), projection for global gas demand in 2020 is expected to decline nearly 4%, indicating a downturn double the impact of the 2008 global recession. Even though the short-term outlook seems to be gloomy, management believes that given the current supply-demand estimate, this is a fundamentally strong sector that will grow approximately at a 4% rate per annum.

Notably, investors should know that this Netherlands-based company boasts a solid financial foundation with $21.8 billion in cash and cash equivalents. Apart from its robust cash reserves, the company can tap into the $10-billion undrawn credit lines while accessing its extensive commercial paper programs.

On a significant note, this Hague, the Netherlands-based oil supermajor will not only be guided by its key measures but also constantly monitor the commodity price movement, further aligning its investment decisions with the sector’s movement in reaction to volatile prices.

Zacks Rank & Key Picks

Shell currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the energy space are Exxon Mobil Corporation XOM, Gulfport Energy Corporation GPOR and Chesapeake Energy Corporation CHK, each presently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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