Analyst Note
| Allen Good, CFA |Shell reported that second-quarter adjusted earnings fell to $638 million from $3.5 billion a year ago. The decline was largely the result of the decline in demand from the global COVID-19 pandemic and accompanying fall in commodity prices and product margins. The adjusted figure excludes $16.8 billion in post-tax impairment charges Shell previously warned about, which are the result of a reduction in internal appraisal price assumptions due the fallout from the pandemic. Including those charges, second-quarter earnings fell to a loss of $18.1 billion from earnings of $3.0 billion last year. The impairments are noncash charges and do not affect our valuation. Shell’s updated long-term price assumption now matches our midcycle assumption of $60 per barrel used in our valuations. We plan to incorporate the latest results into our model but do not anticipate a material change in our fair value estimate or narrow moat rating. Assuming a recovery in oil prices toward our midcycle price assumption, Shell’s shares are undervalued.