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Royal Dutch Shell Fourth Quarter, Full Year 2020 Results; 1Q21 Outlook

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   |    Thursday,February 04,2021

Shell reported its Q4 2020 results.

Income attributable to Royal Dutch Shell plc shareholders amounted to a loss of $4.0 billion for the fourth quarter 2020, which included post-tax impairment charges of $2.7 billion and charges of $1.1 billion mainly due to onerous contract provisions. Fourth quarter 2020 results reflected lower realised prices for oil and LNG as well as lower production volumes and realised refining margins compared with the fourth quarter 2019. This was partly offset by lower operating expenses and higher chemicals margins.

Cost of supplies adjustment attributable to Royal Dutch Shell plc shareholders for the fourth quarter 2020 was negative $0.5 billion.

Adjusted Earnings were $0.4 billion for the fourth quarter 2020, reflecting lower realised prices for oil and LNG as well as lower production volumes and realised refining margins compared with the fourth quarter 2019. This was partly offset by lower operating expenses and higher chemicals margins.

Cash flow from operating activities for the fourth quarter 2020 was $6.3 billion, which included cash outflows from commodity derivatives of $0.9 billion and negative working capital movements of $0.3 billion. Cash flow from investing activities for the quarter was an outflow of $5.4 billion, driven mainly by capital expenditure.

Net debt was $75.4 billion at the end of the fourth quarter 2020, compared with $73.5 billion at the end of the third quarter 2020, mainly driven by lower free cash flow generation and by lease additions, partly offset by favourable foreign currency exchange translation differences. Gearing was 32.2% at the end of the fourth quarter 2020, compared with 31.4% at the end of the third quarter 2020, mainly driven by increased net debt and reduced earnings, partly offset by favourable foreign currency exchange translation differences and a reduction in pensions deficit.

Total dividends distributed to Royal Dutch Shell plc shareholders in the quarter were $1.3 billion. The Board expects that the first quarter 2021 interim dividend will be US$0.1735 per share, an increase of ~4% over the US dollar dividend for the fourth quarter 2020.

Q4 Portfolio Developments

Integrated Gas

During the quarter, QGC Common Facilities Company Pty Ltd, a wholly-owned subsidiary of Shell, announced that it has agreed to the sale of a 26.25% interest in the Queensland Curtis LNG Common Facilities to Global Infrastructure Partners Australia for US$2.5 billion. The transaction is subject to regulatory approval in Australia and customary conditions and is expected to complete in the first half of 2021.

Upstream

In January 2021, Shell completed the sale of its 30% interest in Oil Mining Lease 17 in the Eastern Niger Delta, and associated infrastructure, to TNOG Oil and Gas Limited, a related company of Heirs Holdings Limited and Transnational Corporation of Nigeria Plc, for a consideration of $533 million. A total of $453 million was paid by completion with the balance to be paid over an agreed period.

Fourth quarter segment earnings were $20 million. This included a net charge of $519 million due to the fair value accounting of commodity derivatives and a charge of $481 million related to onerous contract provisions. These net charges are part of identified items (see Reference A).

Compared with the fourth quarter 2019, Integrated Gas Adjusted Earnings of $1,109 million primarily reflected lower realised prices for LNG, oil and gas and lower contributions from trading and optimisation, partly offset by lower operating expenses.

Cash flow from operating activities for the quarter was $2,203 million, primarily driven by Adjusted Earnings before non-cash expenses including depreciation, as well as dividends received. This was partly offset by cash outflows from commodity derivatives of $289 million.

Compared with the fourth quarter 2019, total oil and gas production decreased by 1% mainly due to more maintenance activities and field decline, partly offset by the transfer of the Rashpetco operations in Egypt from the Upstream segment and PSC effects. LNG liquefaction volumes decreased mainly as a result of feedgas constraints and maintenance activities.

Full year segment earnings amounted to a loss of $6,278 million. This included a post-tax impairment charge of $9,282 million mainly related to the Queensland Curtis LNG and Prelude floating LNG operations in Australia. Also included were a net charge of $969 million due to the fair value accounting of commodity derivatives and a charge of $607 million related to onerous contract provisions. These charges are part of identified items (see Reference A).

Compared with the full year 2019, Integrated Gas Adjusted Earnings of $4,383 million primarily reflected lower realised prices for LNG, oil and gas and lower contributions from trading and optimisation, partly offset by lower operating expenses.

Cash flow from operating activities for the full year 2020 was $11,175 million, primarily driven by Adjusted Earnings before non-cash expenses including depreciation and well write-offs.

Compared with the full year 2019, total oil and gas production decreased by 1% mainly due to more maintenance activities and lower wells performance, partly offset by the transfer of the Rashpetco operations in Egypt from the Upstream segment and field ramp-ups. LNG liquefaction volumes decreased mainly as a result of lower feedgas availability, more maintenance and cargo timing.

Fourth quarter segment earnings amounted to a loss of $2,091 million. This included a post-tax impairment charge of $1,272 million mainly related to partial impairment of the Appomattox asset in the US Gulf of Mexico. This charge is part of identified items (see Reference A).

Compared with the fourth quarter 2019, Upstream Adjusted Earnings were a loss of $748 million, reflecting lower oil and gas prices, lower production volumes mainly driven by hurricanes affecting US Gulf of Mexico production and OPEC+ restrictions, and unfavourable deferred tax movements. These were partly offset by lower well write-offs, and lower operating expenses.

Cash flow from operating activities for the quarter was $2,010 million, primarily driven by Adjusted Earnings before non-cash expenses including depreciation.

Compared with the fourth quarter 2019, total production decreased by 14%, mainly due to the impact of more maintenance activities, hurricanes in the US Gulf of Mexico, the impact of divestments, OPEC+ restrictions, and lower production in the NAM joint venture. New fields and ramp-ups offset the impact of field declines.

Full year segment earnings amounted to a loss of $10,785 million. This included a post-tax impairment charge of $6,447 million mainly related to offshore assets in the US Gulf of Mexico, Brazil, Nigeria and Europe, and unconventional assets in North America. Also included was a net charge of $782 million related to the impact of the weakening Brazilian real on a deferred tax position. These net charges are part of identified items (see Reference A).

Compared with the full year 2019, Upstream Adjusted Earnings amounted to a loss of $2,852 million, primarily reflecting lower realised oil and gas prices, and lower production volumes.

Cash flow from operating activities for the full year 2020 was $10,037 million, primarily driven by Adjusted Earnings before non-cash expenses including depreciation.

Compared with the full year 2019, total production decreased by 10%, mainly due to the impact of divestments, lower production in the NAM joint venture, OPEC+ restrictions and higher maintenance. New fields and ramp-ups, mainly in Brazil, offset the impact of field declines.

Fourth quarter segment earnings were a loss of $1,775 million. This included a post-tax impairment charge of $1,325 million, mainly related to assets in the Netherlands and in Singapore, and the shutdown of the Convent Refinery in the USA. The shutdown of the Convent Refinery also led to further post-tax charges of $661 million, related to provisions for onerous contracts, and redundancy and restructuring. Also included was a net charge of $352 million due to the fair value accounting of commodity derivatives. These charges are part of identified items (see Reference A).

Compared with the fourth quarter 2019, Oil Products Adjusted Earnings of $540 million for the quarter reflected lower realised refining margins due to a weaker macroeconomic environment and the COVID-19 pandemic, and lower contributions from trading and optimisation. This was partly offset by lower operating expenses, and favourable deferred tax movements.

Cash flow from operating activities for the fourth quarter 2020 was $1,198 million, primarily driven by Adjusted Earnings before depreciation, as well as positive working capital movements of $416 million, offset by cash outflows for commodity derivatives of $784 million.

With effect from January 1, 2020, certain Oil Products contracts are no longer included in sales volumes (see Note 2). Excluding this impact, Oil Products sales volumes decreased due to the impact of COVID-19 with lower Refining & Trading and Marketing sales volumes, compared with the fourth quarter 2019.

▪Refining & Trading Adjusted Earnings reflected lower realised refining margins, and lower contributions from trading and optimisation. This was partly offset by favourable deferred tax movements and lower operating expenses, compared with the fourth quarter 2019.

▪Marketing Adjusted Earnings reflected lower marketing sales volumes and unfavourable deferred tax movements, partly offset by strong retail and global commercial margins, and lower operating expenses, compared with the fourth quarter 2019.

With effect from January 1, 2020, Shell discloses utilisation instead of availability to improve transparency on refinery production volumes. Utilisation is defined as the actual usage of the plants as a percentage of the rated capacity. Refinery utilisation was 72% compared with 78% in the fourth quarter 2019, mainly due to lower demand and economic optimisation of the plants, as well as the shutdown of the Convent Refinery.

Full year segment earnings were a loss of $494 million. This included a post-tax impairment charge of $5,530 million, as a result of revised medium- and long-term price outlook assumptions in response to changes to the energy market demand and supply fundamentals as well as the macroeconomic conditions and the COVID-19 pandemic, and the shutdown of the Convent Refinery in the USA. This shutdown also led to further post-tax charges of $661 million, related to provisions for onerous contracts, and redundancy and restructuring. Segment earnings also included further redundancy and

restructuring costs of $223 million and a net charge of $101 million due to the fair value accounting of commodity derivatives. These net charges are part of identified items (see Reference A).

Compared with the full year 2019, Oil Products Adjusted Earnings of $5,995 million reflected lower realised refining margins and lower marketing sales volumes due to the weak macroeconomic environment and the COVID-19 pandemic. These were partly offset by lower operating expenses, contributions from crude and oil products trading and optimisation, and favourable deferred tax movements.

Cash flow from operating activities for the full year 2020 was $10,845 million, primarily driven by Adjusted Earnings before depreciation and positive working capital movements. This was partly offset by cost-of-sales adjustments for the full year 2020.

With effect from January 1, 2020, certain Oil Products contracts are no longer included in sales volumes (see Note 2). Excluding this impact, Oil Products sales volumes decreased due to lower refining & trading and marketing sales volumes, compared with the full year 2019.

▪Refining & Trading Adjusted Earnings reflected lower realised refining margins, partly offset by lower operating expenses, contributions from crude and oil products trading and optimisation as well as favourable deferred tax movements, compared with the full year 2019.

▪Marketing Adjusted Earnings reflected lower marketing sales volumes due to the COVID-19 pandemic, partly offset by strong retail and global commercial margins, and lower operating expenses, compared with the full year 2019.

With effect from January 1, 2020, Shell discloses utilisation instead of availability to improve transparency on refinery production volumes. Utilisation is defined as the actual usage of the plants as a percentage of the rated capacity. Refinery utilisation was 72% compared with 78% in the full year 2019, mainly due to lower demand and economic optimisation of the plants.

Fourth quarter segment earnings were $367 million, which reflected higher realised margins in base chemicals and intermediates from a stronger price environment, compared with the fourth quarter 2019. There were no significant identified items during the quarter.

Cash flow from operating activities for the quarter was $774 million, primarily driven by Adjusted Earnings before depreciation and dividends received from joint ventures.

With effect from January 1, 2020, Shell discloses utilisation instead of availability to improve transparency on chemicals production volumes. Utilisation is defined as the actual usage of the plants as a percentage of the rated capacity. Chemicals manufacturing plant utilisation in the fourth quarter 2020 was 79% compared with 71% in the fourth quarter 2019, mainly due to improved site availability, with a higher level of maintenance activities in 2019.

Full year segment earnings were $808 million, which reflected higher realised margins from a stronger price environment in the fourth quarter, partly offset by lower volumes due to the COVID-19 pandemic compared with the full year 2019. Segment earnings included a charge of $104 million due to a legal provision and redundancy and restructuring costs of $38 million. These net charges are part of identified items (see Reference A).

Compared with the full year 2019, Chemicals Adjusted Earnings of $962 million reflected higher realised margins from a stronger price environment in the fourth quarter, partly offset by lower volumes due to the COVID-19 pandemic.

Cash flow from operating activities for the full year 2020 was an inflow of $1,664 million, primarily driven by Adjusted Earnings before depreciation. This was partly offset by cost-of-sales adjustments for the full year 2020.

With effect from January 1, 2020, Shell discloses utilisation instead of availability to improve transparency on chemicals production volumes. Utilisation is defined as the actual usage of the plants as a percentage of the rated capacity. Chemicals manufacturing plant utilisation was 80% compared with 76% in the full year 2019, mainly due to higher maintenance activities in Asia and Europe in 2019, and the impact of strike actions in the Netherlands in 2019.

Fourth quarter segment earnings were an expense of $954 million. This included a loss of $124 million from the deferred tax impact of the strengthening Brazilian real on financing positions, which is part of identified items (see Reference A).

Adjusted Earnings were an expense of $836 million, reflecting favourable currency exchange rate effects and lower net interest expense, compared with the fourth quarter 2019.

Full year segment earnings were an expense of $2,952 million. This included gains of $454 million from the deferred tax impact of the weakening Brazilian real on financing positions, which is part of identified items (see Reference A).

Adjusted Earnings were an expense of $3,412 million, reflecting adverse currency exchange rate effects and lower interest expense, compared with the full year 2019.

Reserves Update

When final volumes are reported in the 2020 Annual Report and Accounts and 2020 Form 20-F, Shell expects that SEC proved oil and gas reserves reductions before taking into account production will be approximately 0.7 billion boe, and that 2020 production will be approximately 1.3 billion boe. As a result, total proved reserves on an SEC basis are expected to be approximately 9.1 billion boe. Acquisitions and divestments of 2020 reserves are expected to account for a net reduction of approximately 0.1 billion boe.

The proved Reserves Replacement Ratio on an SEC basis is expected to be -53% for the year and 23% for the 3-year average. Excluding the impact of acquisitions and divestments, the proved Reserves Replacement Ratio is expected to be -46% for the year and 34% for the 3-year average.

Further information will be provided in the 2020 Annual Report and Accounts and 2020 Form 20-F, which are expected to be filed in March 2021.

Q1 2021 Outlook

As a result of the COVID-19 pandemic, there continues to be significant uncertainty in the macroeconomic conditions with an expected negative impact on demand for oil, gas and related products. The first quarter 2021 outlook provides ranges for operational and financial metrics based on current expectations, but these are subject to change in the light of evolving market conditions. Due to demand or regulatory requirements and/or constraints in infrastructure, Shell may need to take measures to curtail or reduce oil and/or gas production, LNG liquefaction as well as utilisation of refining and chemicals plants and similarly sales volumes could be impacted. Such measures will likely have a variety of impacts on our operational and financial metrics.

• Integrated Gas production is expected to be approximately 900 - 950 thousand boe/d. LNG liquefaction volumes are expected to be approximately 8.0 - 8.6 million tonnes.
• Upstream production is expected to be approximately 2,400 - 2,600 thousand boe/d.
• Refinery utilisation is expected to be approximately 73% - 81%.
• Oil Products sales volumes are expected to be approximately 4,000 - 5,000 thousand b/d.
• Chemicals manufacturing plant utilisation is expected to be approximately 80% - 88%.
• Chemicals sales volumes are expected to be approximately 3,600 - 3,900 thousand tonnes.