Shell plc — FY2019 Form 20-F
Reporting period: Year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing; the supplied text does not provide a clear set of Q4-only financial results. Shell reports under IFRS as issued by the IASB, in U.S. dollars.
Business context and financial performance
Shell is an integrated energy company operating through Integrated Gas, Upstream, Downstream and Corporate. Downstream generated most third-party revenue. The year featured lower average oil and gas prices, weaker refining and chemicals conditions, and a challenging global economy.
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $344.9 billion | $388.4 billion |
| Income before taxation | $25.5 billion | $35.6 billion |
| Income for the period | $16.4 billion | $23.9 billion |
| Income attributable to Shell shareholders | $15.8 billion | $23.4 billion |
| Diluted earnings per share | $1.95 | $2.80 |
| Cash flow from operating activities | $42.2 billion | $53.1 billion |
| Free cash flow | $26.4 billion | $39.4 billion |
| Organic free cash flow | $20.1 billion | $31.2 billion |
| Capital expenditure | $23.0 billion | $23.0 billion |
| Cash capital expenditure | $23.9 billion | $24.1 billion |
| Capital investment | $28.8 billion | $24.9 billion |
| Return on average capital employed | 6.7% | 9.4% |
| Dividend per share | $1.88 | $1.88 |
Operating cash flow declined mainly because of lower earnings and an unfavorable working-capital impact. Cash flow from investing activities was an outflow of $15.8 billion. Financing activities used $35.2 billion, including $15.2 billion of dividends, $10.2 billion of share repurchases, $3.4 billion of net debt repayments and $4.6 billion of interest paid.
Debt, liquidity and operating metrics
- Total debt was $96.4 billion at year-end, up from $76.8 billion; net debt was $79.1 billion versus $51.4 billion.
- Gearing increased to 29.3% from 20.3%; on an IAS 17 basis, 2019 gearing was 25.0%. Shell’s stated through-cycle gearing objective is 15–25%.
- Cash and cash equivalents were $18.1 billion, compared with $26.7 billion. The $10 billion committed credit facilities were undrawn at year-end; $2 billion matured in 2020 and $8 billion in 2024.
- 2019 debt included $30.5 billion of lease liabilities following IFRS 16 adoption. Shell attributed $15.7 billion of the increase in total debt to IFRS 16.
- Oil and gas production available for sale was 3.665 million boe/day, essentially unchanged from 2018. Proved reserves fell to 11.096 billion boe from 11.578 billion boe.
Material changes versus 2018
- Revenue decreased to $344.9 billion from $388.4 billion; income attributable to shareholders fell to $15.8 billion from $23.4 billion.
- CCS segment earnings, a non-IFRS measure, fell to $15.8 billion from $24.4 billion. Integrated Gas earnings were $8.6 billion versus $11.4 billion; Upstream $4.2 billion versus $6.8 billion; Downstream $6.3 billion versus $7.6 billion; and Corporate recorded a $3.3 billion loss versus a $1.5 billion loss.
- Lower realized prices and higher impairments weighed on Integrated Gas and Upstream. Downstream faced weaker refining and chemicals margins, partly offset by stronger Marketing margins and lower operating costs.
- ROACE declined, operating cash flow and free cash flow fell, and gearing increased. Capital investment rose, while cash capital expenditure was broadly stable.
- IFRS 16 was adopted from January 1, 2019 using a modified retrospective approach; 2018 comparatives were not restated. This changed reported debt, expenses and cash-flow classification.
Outlook, commentary and risks
Management expected 2020 cash capital expenditure at the lower end of a $24–29 billion range, and divestments of more than $10 billion over 2019–2020. Shell intended to complete its $25 billion buyback programme; approximately $15 billion had been completed by February 20, 2020. Management said the pace remained subject to macroeconomic conditions and further debt reduction. The Board expected a first-quarter 2020 dividend of $0.47 per share.
After year-end, COVID-19 and uncertainty around oil supply caused significant commodity-market volatility. Shell reported no material operational impact to date when the report was prepared, but warned that the scale and duration of events could affect earnings, cash flow and financial condition. Management’s three-year viability assessment concluded Shell could continue operating and meet liabilities, including under specified severe-but-possible scenarios.
- Market and execution risks: Commodity-price and demand volatility, refining and chemicals margins, project delays or overruns, reserve replacement and impairment sensitivity.
- Climate and transition risks: Regulation, litigation, changing demand, physical climate effects, and costs or delays associated with emissions reduction. Shell’s stated ambition was to reduce its Net Carbon Footprint by around 20% by 2035 and 50% by 2050 from 2016, in step with society.
- Safety and environment: Seven fatalities occurred under Shell operational control in 2019; Tier 1 and 2 process-safety events rose to 130 from 121. Operational spills above 100 kg declined to 70 from 93.
- Contingencies: Shell disclosed ongoing climate-change, Louisiana coast, pesticide and Nigerian disputes, among others. It said potential outcomes were uncertain and generally not expected to materially affect the consolidated statements, but noted uncertainty around future effects. A Brazilian tax case could result in a potential liability of approximately $5.3 billion if the levy is upheld. OPL 245 investigations and litigation remained ongoing, with the potential amount not practicably estimable.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The Audit Committee highlighted reserves estimates, asset recoverability, refining-margin forecasts, deferred tax assets, trading valuations and the first-year application of IFRS 16 as significant audit matters.
Investor verification priorities
- Review the audited statements and cash-flow details, particularly the drivers of lower operating cash flow and the impact of working capital.
- Reconcile debt, net debt and gearing with and without IFRS 16 lease liabilities; assess maturities, committed facilities and the debt-reduction objective.
- Examine impairment charges, commodity-price and refining-margin assumptions, and the basis and sensitivity of proved-reserve estimates.
- Track the status, potential exposure and timing of the Brazilian tax matter, OPL 245 proceedings, Nigerian disputes and climate-related litigation.
- Assess whether the 2020 capital-spending, divestment, buyback and dividend intentions remained achievable as COVID-19 and commodity-market conditions evolved.
- Evaluate safety performance, including fatalities and process-safety events, alongside emissions targets and their measurement assumptions.