Business Context and Reporting Period
This Form 6-K filing by Royal Dutch Shell plc, dated March 17, 2009, outlines the company's strategic update for the year. The report addresses the global economic slowdown and sharp downturn in energy prices while affirming long-term positive fundamentals for oil and gas. Shell is maintaining a prudent approach, balancing near-term recession challenges with long-term investment programs to build new upstream and downstream capacity.
Key Financial Metrics and Operational Data
- Capital Investment: Shell plans to invest approximately $31-$32 billion in 2009.
- Dividends: Total dividends for 2009 are expected to be approximately $10 billion, representing a 5% increase in the Q1 2009 dividend per share compared to Q1 2008.
- Liquidity and Debt: End-2008 gearing stood at 6%, indicating a strong balance sheet with flexibility to fund growth and maintain dividends.
- Reserves: Net reserves attributable to shareholders at end-2008 were 11.9 billion boe, unchanged from the prior year, with a reserves life of 10 years.
- Reserves Replacement (2006-2008): Organic reserves replacement ratio was 126% (excluding price effects) and 120% (including price effects).
- Reserves Replacement (2008): Organic reserves replacement ratio was 95% (excluding price effects) and 97% (including price effects).
- Exploration Costs: Exploration drilling in 2008 added 1.2 billion barrels of resources at a finding cost of $2-3 per barrel.
Material Changes and Strategic Actions
Shell is executing a portfolio rejuvenation strategy focused on profitability and scale. Key changes include:
- Upstream Capacity: Investments are underway for oil and gas fields with ~1 million boe/d capacity, targeting 2-3% annual production growth by 2012. Pre-FID options could add another 1 million boe/d.
- LNG Expansion: New capacity of 6.5 million tonnes per year, a 40% increase over 2008 levels.
- Downstream Expansion: New refining and Gas to Liquid (GTL) assets totaling ~300,000 barrels per day, a 7% increase for 2011-12. Ethylene capacity is increasing by 13% and mono-ethylene glycol capacity by ~60%.
- Divestitures: In 2008, Shell disposed of selected refining capacity (totaling over 800,000 b/d sold this decade) and upstream assets (~300,000 boe/d sold this decade). Potential exits from refining and marketing assets in Germany and New Zealand are being considered, impacting a further 5% of global refining capacity.
Guidance, Outlook, and Risks
Management, led by CEO Jeroen van der Veer, maintains a long-term perspective despite short-term market volatility. The company anticipates the economic downturn could last more than a year and is planning accordingly. Shell views the current environment as an opportunity to reduce supply chain costs due to spare capacity in the services industry.
Key Risks and Contingencies:
- Price fluctuations in crude oil and natural gas.
- Changes in demand for products and currency fluctuations.
- Drilling and production results, reserve estimates, and environmental risks.
- Political risks, including expropriation and contract renegotiations in developing countries.
- Legislative and regulatory developments, including potential litigation.
The filing includes standard forward-looking statement disclaimers, noting that actual results may differ materially from expectations due to these risks.
Investor Verification Checklist
- Verify the sustainability of the 5% dividend increase given the projected $31-$32 billion capital expenditure in a downturn.
- Confirm the timeline and execution risk for the ~1 million boe/d upstream capacity and 6.5 million tonnes LNG projects.
- Monitor the progress of potential divestitures in Germany and New Zealand and their impact on refining margins.
- Assess the impact of the 6% gearing ratio on future borrowing capacity if commodity prices remain depressed.
- Review the 2008 organic reserves replacement ratio of 95-97% to ensure it meets long-term production targets.