Royal Dutch Shell plc 2nd Quarter 2019 and Half Year Unaudited Results

THE HAGUE, Netherlands, Aug. 1, 2019 /PRNewswire/ --

Compared with the second quarter 2018, CCS earnings attributable to shareholders excluding identified items were $3.5 billion, reflecting lower realised oil, gas and LNG prices, weaker realised chemicals and refining margins as well as higher provisions, partly offset by improved production. Earnings also included a negative impact of $63 million related to the implementation of IFRS 16.

Cash flow from operating activities for the second quarter 2019 was $11.0 billion and included positive working capital movements of $0.6 billion. Compared with the second quarter 2018, cash flow from operating activities excluding working capital movements mainly reflected lower earnings, partly offset by reduced cash margining outflows on commodity derivatives. This also included a positive impact of $1.0 billion related to the implementation of IFRS 16.

Total dividends distributed to shareholders in the quarter were $3.8 billion. Today, Shell launches the next tranche of the share buyback programme, with a maximum aggregate consideration of $2.75 billion in the period up to and including October 28, 2019. In aggregate, since the launch of the share buyback programme, almost 294 million A ordinary shares have been bought back for cancellation for a consideration of $9.25 billion.

Royal Dutch Shell Chief Executive Officer Ben van Beurden commented: "We have delivered good cash flow performance, despite earnings volatility, in a quarter that has seen challenging macroeconomic conditions in refining and chemicals as well as lower gas prices. This quarter we achieved some key milestones, such as the start-up of Appomattox and the first LNG cargo from Prelude. These add to our competitive portfolio, which is expected to generate additional cash in the coming quarters.

The resilience of our Upstream and customer-facing businesses and their ability to generate cash support the delivery of our 2020 outlook, which remains unchanged."

Supplementary financial and operational disclosure for this quarter is available at www.shell.com/investor.

As a result of the implementation of IFRS 16, net debt increased by $16,103 million. Second quarter 2019 reported Gearing was 27.6% on an IFRS 16 basis, comparable with 23.0% on an IAS 17 basis. Gearing included an additional negative impact of 0.4%, arising from IFRS 11 accounting interpretations (see Note 1).

SECOND QUARTER 2019 PORTFOLIO DEVELOPMENTS

Integrated Gas

During the quarter, Shell, along with its joint venture partners, announced that the first shipment of LNG sailed from Shell's Prelude Floating Liquefied Natural Gas facility (Shell interest 67.5%).

Upstream

Shell announced, during the quarter, the start-up of Appomattox ahead of schedule. Appomattox (Shell interest 79%) is the first commercial discovery brought into production in the deep-water US Gulf of Mexico Norphlet formation and has an expected peak production of 175 thousand boe/d.

During the quarter, the Libra Consortium (Shell interest 20%) announced the final investment decision to contract the Mero 2 floating production, storage and offloading (FPSO) vessel to be deployed at the Mero field offshore Santos Basin in Brazil. The FPSO has the capacity to process up to 180 thousand boe/d.

In July, Shell completed the divestment of its 22.5% non-operating interest in the Caesar Tonga asset in the US Gulf of Mexico to Equinor for $965 million.

Downstream

During the quarter, Shell announced the sale of Shell's Martinez refinery in the US to PBF Energy, Inc., for up to $1.0 billion consideration plus the value of hydrocarbon inventory, crude oil supply and product offtake agreements, capex and other adjustments. The transaction is subject to closing conditions and regulatory approvals and is expected to close in 2019.

PERFORMANCE BY SEGMENT

Second quarter identified items primarily reflected impairments and write-offs totalling $479 million, mainly in Trinidad and Tobago and Australia, as well as a loss of $112 million related to the fair value accounting of commodity derivatives. Identified items also comprised a gain of $193 million on sale of assets.

Compared with the second quarter 2018, Integrated Gas earnings excluding identified items reflected lower realised oil, gas and LNG prices, decreased production, the impacts following the Heads of Agreement with the government of Trinidad and Tobago as well as tax provisions. Earnings also included a positive impact of $39 million related to the implementation of IFRS 16.

Total production was 3% lower compared with the second quarter 2018, mainly due to divestments and the transfer of the Salym asset into the Upstream segment, partly offset by production from field ramp-ups in Australia and Trinidad and Tobago. LNG liquefaction volumes increased by 2% compared with the second quarter 2018, benefiting from higher feedgas availability, partly offset by divestments.

Cash flow from operating activities of $3,403 million included positive working capital movements of $579 million. Compared with the second quarter 2018, cash flow from operating activities excluding working capital movements mainly reflected lower earnings, partly offset by reduced cash margining outflows on commodity derivatives and lower tax payments. This also included a positive impact of $323 million related to the implementation of IFRS 16.

Half year identified items included impairments and write-offs totalling $479 million, mainly in Trinidad and Tobago and Australia, as well as a gain of $122 million related to the fair value accounting of commodity derivatives. Identified items also comprised a gain of $188 million on sale of assets.

Compared with the first half 2018, Integrated Gas earnings excluding identified items were impacted by lower realised oil prices, decreased production and the impacts following the Heads of Agreement with the government of Trinidad and Tobago, partly offset by increased contributions from LNG portfolio optimisation. Earnings also included a positive impact of $98 million related to the implementation of IFRS 16.  

Compared with the first half 2018, total production was impacted by divestments and the transfer of the Salym asset into the Upstream segment, partly offset by production from field ramp-ups in Australia and Trinidad and Tobago. LNG liquefaction volumes were at a similar level as in the first half 2018 with the additional volumes from higher feedgas availability being offset by divestments.

Cash flow from operating activities of $7,630 million included positive working capital movements of $1,090 million. Compared with the first half 2018, cash flow from operating activities excluding working capital movements increased slightly. This also included a positive impact of $554 million related to the implementation of IFRS 16.

Second quarter identified items primarily reflected a gain of $98 million associated with sale of assets and a gain of $79 million due to a tax rate change. Identified items also included a gain of $52 million related to the impact of the strengthening Brazilian real on a deferred tax position.

Compared with the second quarter 2018, Upstream earnings excluding identified items reflected lower realised oil and gas prices, higher depreciation from field ramp-ups as well as increased receivables provisions, partly offset by higher volumes and lower taxation arising from currency exchange rate effects. Earnings also included a positive impact of $47 million related to the implementation of IFRS 16.

Compared with the second quarter 2018, total production increased by 7%, mainly due to field ramp-ups in North America and the transfer of the Salym asset from the Integrated Gas segment, partly offset by field decline and divestments.

Cash flow from operating activities of $5,616 million included positive working capital movements of $238 million. Compared with the second quarter 2018, cash flow from operating activities excluding working capital movements mainly benefited from lower tax payments. This also included a positive impact of $212 million related to the implementation of IFRS 16.

Half year identified items primarily reflected a gain of $151 million associated with sale of assets and a gain of $79 million related to a tax rate change. Identified items also comprised a loss of $45 million related to the fair value accounting of commodity derivatives.

Compared with the first half 2018, Upstream earnings excluding identified items reflected lower realised oil prices and higher depreciation from field ramp-ups, partly offset by higher volumes. Earnings also included a positive impact of $90 million related to the implementation of IFRS 16.

Compared with the first half 2018, total production increased by 4%, mainly due to field ramp-ups in North America and the transfer of the Salym asset from the Integrated Gas segment, partly offset by field decline and divestments.

Cash flow from operating activities of $10,895 million included positive working capital movements of $127 million. Compared with the first half 2018, cash flow from operating activities excluding working capital movements mainly benefited from higher volumes and lower tax payments. This also included a positive impact of $400 million related to the implementation of IFRS 16.

Second quarter identified items primarily reflected a charge of $237 million related to legal provisions in Chemicals as well as impairments, net of reversals, of $140 million associated with divestments, partly offset by a gain of $113 million related to the fair value accounting of commodity derivatives.

Compared with the second quarter 2018, Downstream earnings excluding identified items reflected lower realised base chemicals, intermediates and refining margins, partly offset by higher realised retail and global commercial margins. Earnings also included a positive impact of $46 million related to the implementation of IFRS 16.

Cash flow from operating activities of $2,398 million included negative working capital movements of $64 million. Compared with the second quarter 2018, cash flow from operating activities excluding working capital movements mainly reflected lower earnings and higher cash cost of sales. This also included a positive impact of $510 million related to the implementation of IFRS 16.

Oil Products

• Refining & Trading earnings excluding identified items included a positive impact of $19 million related to the implementation of IFRS 16. Excluding this impact, earnings reflected lower realised refining margins, mainly in the US Gulf Coast and Europe, partly offset by favourable currency exchange rate effects compared with the second quarter 2018.

Refinery availability increased to 89% from 87% in the second quarter 2018, mainly due to lower planned maintenance activities.

• Marketing earnings excluding identified items included a positive impact of $21 million related to the implementation of IFRS 16. Excluding this impact, earnings reflected increased realised retail and global commercial margins compared with the second quarter 2018.

Compared with the second quarter 2018, Oil Products sales volumes decreased by 2%, mainly due to lower trading volumes.

Chemicals

• Chemicals earnings excluding identified items included a positive impact of $6 million related to the implementation of IFRS 16. Excluding this impact, earnings reflected lower realised base chemicals and intermediates margins in Asia and Europe as well as lower volumes.

Chemicals manufacturing plant availability decreased to 85% from 93% in the second quarter 2018, mainly reflecting higher maintenance activities in Asia and Europe, including the impact of strike actions in the Netherlands.

Half year identified items primarily reflected a charge of $237 million related to legal provisions in Chemicals as well as impairments, net of reversals, of $204 million, mainly related to divestments.

Compared with the first half 2018, Downstream earnings excluding identified items reflected lower realised base chemicals, intermediates and refining margins, partly offset by higher realised retail and global commercial margins. Earnings also included a positive impact of $84 million related to the implementation of IFRS 16.

Cash flow from operating activities of $1,787 million included negative working capital movements of $3,666 million. Compared with the first half 2018, cash flow from operating activities excluding working capital movements mainly reflected lower earnings and higher cash cost of sales. This also included a positive impact of $904 million related to the implementation of IFRS 16.

Oil Products

• Refining & Trading earnings excluding identified items included a positive impact of $33 million related to the implementation of IFRS 16. Excluding this impact, earnings reflected increased contributions from crude oil and oil products trading, partly offset by lower realised refining margins, compared with the first half  2018.

Refinery availability was 90%, at a similar level as in the first half 2018.

• Marketing earnings excluding identified items included a positive impact of $38 million related to the implementation of IFRS 16. Excluding this impact, earnings reflected increased realised retail and global commercial margins compared with the first half 2018.

Compared with the first half 2018, Oil Products sales volumes decreased by 3%, mainly reflecting lower trading volumes.

Chemicals

• Chemicals earnings excluding identified items included a positive impact of $13 million related to the implementation of IFRS 16. Excluding this impact, earnings reflected lower realised base chemicals and intermediates margins.

Chemicals manufacturing plant availability decreased to 90% from 94% in the first half 2018, mainly reflecting higher maintenance activities in Asia and Europe, including the impact of strike actions in the Netherlands.

Second quarter identified items mainly reflected a gain of $53 million on sale of assets, partly offset by a tax charge of $36 million related to the impact of the strengthening Brazilian real on a financing position.

Compared with the second quarter 2018, Corporate earnings excluding identified items included a negative impact of $195 million related to the implementation of IFRS 16. Excluding this impact, earnings mainly reflected higher interest expenses, partly offset by favourable currency exchange rate effects.

Half year identified items mainly reflected a gain of $53 million on sale of assets, partly offset by a tax charge of $26 million related to the impact of the strengthening Brazilian real on a financing position.

Compared with the first half 2018, Corporate earnings excluding identified items included a negative impact of $378 million related to the implementation of IFRS 16. Excluding this impact, earnings mainly reflected lower tax credits and higher interest expenses, partly offset by favourable currency exchange rate effects.

OUTLOOK FOR THE THIRD QUARTER 2019

Integrated Gas production is expected to be at a similar level as in the third quarter 2018. LNG liquefaction volumes are expected to increase slightly compared with the third quarter 2018, mainly due to project ramp-ups.

Compared with the third quarter 2018, Upstream production is expected to be higher by some 50 – 100 thousand boe/d, mainly due to field ramp-ups and the transfer of the Salym asset from the Integrated Gas segment, partly offset by field decline and divestments.

Refinery availability is expected to be at a similar level as in the third quarter 2018.

Oil Products sales volumes are expected to decrease by some 40 – 70 thousand boe/d compared with the same period a year ago, mainly as a result of the divestment in Argentina.

Chemicals manufacturing plant availability is expected to be at a similar level as in the third quarter 2018.

Corporate earnings excluding identified items are expected to be a net charge of $700 – 850 million in the third quarter 2019 and a net charge of $2,900 – 3,200 million for the full year 2019. This excludes the impact of currency exchange rate effects.

UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

^1.  See Note 8 "Adoption of IFRS 16 Leases".
^2.  See Note 7 "Change in presentation of Consolidated Statement of Cash Flows".

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

1.  Basis of preparation

These unaudited Condensed Consolidated Interim Financial Statements ("Interim Statements") of Royal Dutch Shell plc ("the Company") and its subsidiaries (collectively referred to as "Shell") have been prepared in accordance with IAS 34 Interim Financial Reporting as issued by the International Accounting Standards Board (IASB) and as adopted by the European Union, and on the basis of the same accounting principles as those used in the Annual Report and Form 20-F for the year ended December 31, 2018 (pages 167 to 214) as filed with the US Securities and Exchange Commission, except for the adoption of IFRS 16 Leases on January 1, 2019, and should be read in conjunction with that filing.

The Directors consider it appropriate to continue to adopt the going concern basis of accounting in preparing these Interim Statements.

Under IFRS 16, all lease contracts, with limited exceptions, are recognised in financial statements by way of right-of-use assets and corresponding lease liabilities. Shell applied the modified retrospective transition method without restating comparative information. Further information in respect of the implementation of IFRS 16 is included in Note 8.

In March 2019, the IFRS Interpretations Committee (IFRIC) finalised its decision regarding "Liabilities in relation to a Joint Operator's Interest in a Joint Operation (IFRS 11 Joint Arrangements)", concluding that a joint operator should recognise the liabilities for which it has primary responsibility, which may be different from its share in the joint operation. A review of the impact of this decision was conducted in the second quarter 2019, leading to the recognition of an additional $1.4 billion of lease liabilities, mainly classified under non-current debt, and a corresponding sublease receivable, as at June 30, 2019.

In March 2019, IFRIC made its agenda decision regarding "Physical settlement of contracts to buy or sell a non-financial item (IFRS 9)". The impact of this decision is under review.

The financial information presented in the unaudited Interim Statements does not constitute statutory accounts within the meaning of section 434(3) of the Companies Act 2006 ("the Act"). Statutory accounts for the year ended December 31, 2018 were published in Shell's Annual Report and Form 20-F and a copy was delivered to the Registrar of Companies for England and Wales. The auditor's report on those accounts was unqualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report and did not contain a statement under sections 498(2) or 498(3) of the Act.

2.  Segment information

Segment earnings are presented on a current cost of supplies basis (CCS earnings), which is the earnings measure used by the Chief Executive Officer for the purposes of making decisions about allocating resources and assessing performance. On this basis, the purchase price of volumes sold during the period is based on the current cost of supplies during the same period after making allowance for the tax effect. CCS earnings therefore exclude the effect of changes in the oil price on inventory carrying amounts. Sales between segments are based on prices generally equivalent to commercially available prices.

With the adoption of IFRS 16, the interest expense on leases formerly classified as operating leases is reported under the Corporate segment, while depreciation related to the respective right-of-use assets is reported in the segments making use of the assets. This treatment is consistent with the existing treatment for leases formerly classified as finance leases.

3.  Earnings per share

4.  Share capital

At Royal Dutch Shell plc's Annual General Meeting on May 21, 2019, the Board was authorised to allot ordinary shares in Royal Dutch Shell plc, and to grant rights to subscribe for, or to convert, any security into ordinary shares in Royal Dutch Shell plc, up to an aggregate nominal amount of €190 million (representing 2,720 million ordinary shares of €0.07 each), and to list such shares or rights on any stock exchange. This authority expires at the earlier of the close of business on August 21, 2020, and the end of the Annual General Meeting to be held in 2020, unless previously renewed, revoked or varied by Royal Dutch Shell plc in a general meeting.

5.  Other reserves

The merger reserve and share premium reserve were established as a consequence of Royal Dutch Shell plc becoming the single parent company of Royal Dutch Petroleum Company and The "Shell" Transport and Trading Company, p.l.c., now The Shell Transport and Trading Company Limited, in 2005. The merger reserve increased in 2016 following the issuance of shares for the acquisition of BG Group plc. The capital redemption reserve was established in connection with repurchases of shares of Royal Dutch Shell plc. The share plan reserve is in respect of equity-settled share-based compensation plans.

6.  Derivative financial instruments and debt excluding lease liabilities

As disclosed in the Consolidated Financial Statements for the year ended December 31, 2018, presented in the Annual Report and Form 20-F for that year, Shell is exposed to the risks of changes in fair value of its financial assets and liabilities. The fair values of the financial assets and liabilities are defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Methods and assumptions used to estimate the fair values at June 30, 2019 are consistent with those used in the year ended December 31, 2018, though the carrying amounts of derivative financial instruments measured using predominantly unobservable inputs have changed since that date.

The table below provides the comparison of the fair value with the carrying amount of debt excluding lease liabilities, disclosed in accordance with IFRS 7 Financial Instruments: Disclosures.

7.  Change in presentation of Consolidated Statement of Cash Flows

With effect from January 1, 2019, the starting point for the Consolidated Statement of Cash Flows is 'Income before taxation' (previously: Income). Furthermore, to improve transparency, "Retirement benefits" and "Decommissioning and other provisions" have been separately disclosed. The "Other" component of cash flow from investing activities has been expanded to distinguish between cash inflows and outflows. Prior period comparatives for these line items have been revised to conform with current year presentation. In addition, a new line item, "Derivative financial instruments", has been introduced to cash flow from financing activities. Overall, the revisions do not have an impact on cash flow from operating activities, cash flow from investing activities or cash flow from financing activities, as previously published.

8.  Adoption of IFRS 16 Leases

IFRS 16 was adopted with effect from January 1, 2019. Under the new standard, all lease contracts, with limited exceptions, are recognised in the financial statements by way of right-of-use assets and corresponding lease liabilities. Shell applied the modified retrospective transition method, and consequently comparative information is not restated. As a practical expedient, no reassessment was performed of contracts that were previously identified as leases and contracts that were not previously identified as containing a lease applying IAS 17 Leases and IFRIC 4 Determining whether an Arrangement contains a Lease. At January 1, 2019, additional lease liabilities were recognised for leases previously classified as operating leases applying IAS 17. These lease liabilities were measured at the present value of the remaining lease payments, discounted using entity-specific incremental borrowing rates at January 1, 2019. In general, a corresponding right-of-use asset was recognised for an amount equal to each lease liability, adjusted by the amount of any prepaid or accrued lease payment relating to the specific lease contract, as recognised on the balance sheet at December 31, 2018. Provisions for onerous lease contracts at December 31, 2018 were adjusted to the respective right-of-use assets recognised at January 1, 2019.

The reconciliation of differences between the operating lease commitments disclosed under the prior standard and the additional lease liabilities recognised on the balance sheet at January 1, 2019 is as follows:

^{1.  Under the modified retrospective transition method, lease payments were discounted at January 1, 2019 using an incremental borrowing rate representing the rate of interest that the entity within Shell that entered into the lease would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. The incremental borrowing rate applied to each lease was determined taking into account the risk-free rate, adjusted for factors such as the credit rating of the contracting entity and the terms and conditions of the lease. The weighted average incremental borrowing rate applied by Shell upon transition was 7.2%.
2.  Shell has applied the practical expedient to classify leases for which the lease term ends within 12 months of the date of initial application of IFRS 16 as short-term leases. Shell has also applied the recognition exemption for short-term leases.}

Compared with the previous accounting for operating leases under IAS 17, the application of the new standard has a significant impact on the classification of expenditures and cash flows. It also impacts the timing of expenses recognised in the statement of income.

With effect from 2019, expenses related to leases previously classified as operating leases are presented under Depreciation, depletion and amortisation and Interest expense (in 2018 these were mainly reported in Purchases, Production and manufacturing expenses, and Selling, distribution and administrative expenses).

With effect from 2019, payments related to leases previously classified as operating leases are presented under Cash flow from financing activities (in 2018 these were reported in Cash flow from operating activities and Cash flow from investing activities).

The adoption of the new standard had an accumulated impact of $4 million in equity following the recognition of lease liabilities of $16,037 million and additional right-of-use assets of $15,558 million and reclassifications mainly related to pre-paid leases and onerous contracts previously recognised. The detailed impact on the balance sheet at January 1, 2019, is as follows: