Shell Plc annual report, Q4 FY2021

Shell plc — 2021 Form 20-F

Business context and reporting period: Annual report for the fiscal year ended December 31, 2021—not a standalone fourth-quarter filing. Shell is a global energy and petrochemicals group operating in more than 70 countries. Financial statements are prepared under IFRS as issued by the IASB; amounts are in US dollars unless noted.

Financial results and liquidity

Revenue and earnings rebounded amid stronger energy prices and economic recovery. 2021 shareholder income included substantial divestment gains and was affected by derivative accounting; adjusted earnings are a non-GAAP measure. Operating cash flow included a $10.4 billion working-capital outflow, versus a $4.6 billion inflow in 2020. Free cash flow is also a non-GAAP measure. The filing does not provide a single company-wide operating-margin figure.

Shell reported current assets of $128.8 billion and current liabilities of $94.3 billion. Its $10 billion core committed credit facilities were undrawn at year-end. Total debt excluding leases was reported as maturing 7% in 2022, 6% in 2023, 7% in 2024, 10% in 2025 and 69% in 2026 and later. Management said working capital was sufficient for current requirements.

Material changes versus 2020

• Net income swung to $20.1 billion from a $21.7 billion loss; adjusted earnings rose to $19.3 billion from $4.8 billion. The comparison reflects, among other factors, much lower impairment charges than in 2020.
• Operating cash flow increased by $11.0 billion, despite the adverse working-capital movement. Net debt fell by $22.8 billion, primarily on cash generation and divestments.
• Oil and gas production available for sale declined 4% to 3.237 million boe/d. Shell cited divestments, maintenance, field declines and production-sharing contract effects.
• LNG liquefaction volumes declined to 31.0 million tonnes from 33.2 million; LNG sales fell to 64.2 million tonnes from 71.9 million.
• Oil Products sales volumes fell 5% to 4.459 million barrels per day; Chemicals sales volumes fell 5% to 14.216 million tonnes, with Hurricane Ida affecting operations.

Segment earnings on a current cost of supplies basis were $6.3 billion for Integrated Gas, $9.7 billion for Upstream, $2.7 billion for Oil Products, $1.4 billion for Chemicals and a $2.6 billion Corporate expense.

Outlook, strategy, risks and unusual items

• Capital and shareholder returns: 2022 cash capex was expected at the lower end of Shell’s $23–27 billion strategic range. Shell targeted $19–22 billion annual base cash capex, distributions of 20–30% of operating cash flow, and around 4% annual dividend-per-share growth, subject to Board approval. The fourth-quarter 2021 interim dividend was $0.24 per share; management expected $0.25 for first-quarter 2022.
• Transition strategy: Shell targets net-zero emissions by 2050 and a 50% net reduction in operational Scope 1 and 2 emissions by 2030 versus 2016. Its Net Carbon Intensity was 77 gCO2e/MJ in 2021, 2.5% below 2016 but 2.7% higher year over year. Shell cautions that targets depend in part on society’s progress and are subject to uncertainty.
• Russia and Ukraine: After year-end, Shell announced plans to exit ventures with Gazprom and related entities and later to withdraw from Russian hydrocarbons in a phased manner. At year-end it had about $3 billion of non-current assets in Russian ventures and $0.4 billion in Russian downstream operations; Shell expected the exit decisions to result in impairments in 2022. The invasion and sanctions may affect operations, trading, supply chains and financial results.
• Climate litigation: A Dutch court ordered Shell to reduce net Scope 1 emissions by 45% by 2030 versus 2019 and use best efforts to reduce Scope 2 and 3 emissions by the same percentage. Shell appealed. US climate suits and other litigation remain ongoing; outcomes and potential effects are uncertain.
• Market and operating risks: Results remain exposed to oil, gas and chemical prices, demand, refining margins, inflation, COVID-19, geopolitics, regulation, climate transition and physical weather risks. Hurricane Ida and the Texas winter storm adversely affected 2021 earnings by about $400 million and $200 million, respectively. The company also cited Nigeria security and spill risks, Groningen earthquake liabilities, cyber threats, trading and counterparty risks, and potential reserve, impairment and decommissioning-estimate changes.
• Other significant items: 2021 included $15.1 billion of divestment proceeds, including the Permian sale, and a $628 million one-off Nigerian tax-provision release. Reported net income also reflects fair-value movements on commodity derivatives; management highlights accounting mismatches between certain derivatives and related physical contracts.

Ernst & Young issued an unqualified opinion on the financial statements and internal controls. Its audit identified significant judgement areas including reserves, impairments, exploration assets, decommissioning provisions, deferred tax assets and unrealised trading gains and losses.

Investor verification priorities

1. Reconcile reported income to adjusted earnings, including divestment gains, impairments, tax releases and commodity-derivative effects.
2. Assess the sustainability of cash generation after the $10.4 billion working-capital outflow and the contribution of divestments.
3. Review debt and lease obligations, maturity concentrations, and the assumptions behind planned shareholder distributions and capital spending.
4. Track production and LNG volume trends, reserve replacement, and the commercial implications of the announced Russian exit.
5. Evaluate climate targets, the Dutch court ruling and appeal, and the sensitivity of asset values to lower long-term commodity prices.
6. Review exposure to litigation and contingencies, including OPL 245, Nigeria-related claims, Groningen and climate cases; the filing says some potential outcomes cannot be estimated reliably.