Business Context and Reporting Period
This Form 6-K filing by Royal Dutch Shell plc covers the second quarter of 2020, with results announced on July 30, 2020. The reporting period reflects operations in a remarkably challenging environment driven by the COVID-19 pandemic, which caused significant demand declines and price volatility across the energy sector. Management emphasized resilient cash flow generation, safe operations, and decisive cash preservation measures to strengthen the balance sheet.
Key Financial Metrics
| Metric | Q2 2020 | Q2 2019 |
|---|---|---|
| IFRS Earnings (Attributable to Shareholders) | ($18.1) billion | $3.0 billion |
| Adjusted Earnings | $0.6 billion | $3.5 billion |
| Cash Flow from Operations (ex. Working Capital) | $6.5 billion | $10.5 billion |
| Cash Capital Expenditure | $3.6 billion | $5.3 billion |
| Organic Free Cash Flow | ($0.3) billion | $6.2 billion |
| Net Debt | $77.8 billion | $74.9 billion |
| Gearing | 32.7% | 27.6% |
| Return on Average Capital Employed (ROACE) | 5.3% | 8.2% |
| Dividends Paid | $1.2 billion | $3.8 billion |
Impairments totaled $16.8 billion post-tax ($22.3 billion pre-tax), representing 6.1% of average capital employed. Underlying operating expenses were reduced by $1.1 billion compared to Q1 2020, and cash capex was reduced by $1.4 billion compared to Q1 2020.
Material Changes Versus Prior Period
- Earnings Decline: IFRS earnings swung from a $3.0 billion profit in Q2 2019 to an $18.1 billion loss in Q2 2020, primarily due to $16.8 billion in impairments and lower realized prices.
- Production Volumes: Upstream production was 7% lower than Q2 2019 due to divestments and OPEC+ curtailments. Oil Products sales volumes were approximately 39% lower year-over-year, with the largest declines in Aviation, Retail, and Refining & Trading.
- Balance Sheet: Net debt increased by $3.4 billion to $77.8 billion, and gearing rose by 3.8 percentage points to 32.7%. This increase included a 2.8% impact from impairments and pension remeasurement, alongside negative working capital movements of $4.0 billion.
- Cost Reduction: The company is on track to deliver cost reduction targets of $3 - $4 billion, with underlying opex already down $1.1 billion from Q1 2020.
Guidance, Outlook, and Risks
Outlook for Q3 2020
- Integrated Gas: Production expected at 820 - 880 thousand boe/d; Liquefaction at 7.6 - 8.2 million tonnes. Low oil prices are expected to have a more significant impact in Q3 due to price lags in oil-linked LNG term contracts.
- Upstream: Production expected at 2,100 - 2,400 thousand boe/d, reflecting expected OPEC+ and economic curtailments for the entire quarter.
- Oil Products: Sales volumes expected at 4,000 - 5,000 thousand b/d; Refinery utilization at 68% - 76%.
- Chemicals: Sales volumes expected at 3,600 - 3,900 thousand tonnes; Manufacturing plant utilization at 78% - 88%.
Full Year 2020 Guidance
Adjusted earnings are forecast to be a net expense of $3,200 - $3,500 million for the full year 2020, excluding currency exchange rate effects. Cash capex is managed to $20 billion or lower for 2020.
Risks and Contingencies
Key risks include price fluctuations in crude oil and natural gas, changes in demand, currency fluctuations, and the ongoing impact of the COVID-19 pandemic. The filing notes that forward-looking statements are subject to uncertainties that could cause actual results to differ materially. Impairments were driven by revised price and margin assumptions, particularly affecting Integrated Gas projects in Australia and unconventional assets in North America.
Important Facts for Investor Verification
- Impairment Details: Verify the specific asset valuations and future cash flow assumptions used to justify the $16.8 billion post-tax impairment charge, particularly regarding the QGC Integrated Gas project and Prelude floating LNG.
- Liquidity Position: Confirm the status of the $12 billion revolving credit facility signed in April 2020 and the $9.1 billion in long-term debt issued in Q2 to ensure sufficient liquidity coverage.
- Cost Reduction Execution: Monitor the progress of the $3 - $4 billion cost reduction target against actual Q3 and Q4 results to validate the sustainability of the cash preservation strategy.
- Dividend Sustainability: Assess the ability to maintain dividend payments given the reduced cash flow and the significant drop in Q2 dividends to $1.2 billion from $3.8 billion in the prior year.
- Portfolio Developments: Track the completion of the $541 million sale of the Appalachia shale gas position and the progress of the Train 7 LNG project in Nigeria.