Business Context and Reporting Period
This Form 6-K filing by Royal Dutch Shell plc reports unaudited results for the fourth quarter and full year ended December 31, 2010. The report was filed on February 3, 2011. Shell utilizes Current Cost of Supplies (CCS) earnings as a primary performance metric to exclude the impact of oil price changes on inventory carrying amounts.
Key Financial Metrics
| Metric | Q4 2010 | Q4 2009 | Full Year 2010 | Full Year 2009 |
|---|---|---|---|---|
| CCS Earnings ($ million) | 5,696 | 1,177 | 18,643 | 9,804 |
| Income Attributable to Shareholders ($ million) | 6,790 | 1,961 | 20,127 | 12,518 |
| Basic CCS EPS ($) | 0.93 | 0.19 | 3.04 | 1.60 |
| Cash Flow from Operations ($ million) | 5,456 | 5,660 | 27,350 | 21,488 |
| Cash Flow from Ops (excl. working capital) ($ million) | 6,200 | 4,400 | 33,300 | 23,800 |
| Net Capital Investment ($ million) | 1,500 | 5,947 | 23,700 | 22,326 |
| Dividend per Share ($) | 0.42 | 0.42 | 1.68 | 1.68 |
| Gearing Ratio (%) | 17.1% | 15.5% | 17.1% | 15.5% |
Material Changes vs. Prior Period
- Earnings Growth: Full year 2010 CCS earnings increased 90% to $18.6 billion, driven by higher realized oil and gas prices, increased production volumes, and lower depreciation. Q4 2010 CCS earnings surged 384% year-over-year.
- Production Volumes: Full year oil and gas production rose 5% to 3.314 million boe/d. LNG sales volumes increased 25% to 16.76 million tonnes.
- Segment Performance: Upstream earnings grew 91% for the full year. Downstream CCS earnings improved significantly to $2.95 billion from $258 million in 2009, aided by higher marketing earnings and chemicals margins, though refining margins remained under pressure.
- Cost Reduction: Underlying costs declined by $2 billion in 2010, contributing to a total reduction of approximately $4 billion over 2009 and 2010.
- Asset Sales: Shell disposed of $7 billion in non-core assets in 2010, bringing total asset sales over the last five years to approximately $30 billion.
Guidance, Outlook, and Management Commentary
- 2011 Investment: Management expects net capital investment of $25-27 billion in 2011, including a $1.6 billion investment in the Cosan joint venture.
- Dividends: The Q4 2010 dividend was $0.42 per share. The Q1 2011 dividend is expected to be $0.42 per share.
- Growth Targets: Shell targets an 11% increase in oil and gas production from 2009 to 2012. Management projects a 50-80% increase in cash flow from operations from 2009 to 2012, assuming oil prices of $60-$80.
- Strategic Moves: Key projects include the Qatargas 4 LNG facility and the Pearl Gas-to-Liquids plant. Shell also made final investment decisions on the Mars B project (Gulf of Mexico) and BC-10 Phase 2 (Brazil).
- Risks: Management noted weak refining margins, pressure on regional natural gas prices, and volatility in downstream marketing margins due to rising oil prices as headwinds.
Investor Verification Checklist
- Verify the impact of "identified items" (net gain of $1.6 billion in Q4) on reported earnings versus underlying operational performance.
- Confirm the sustainability of the 5% production growth given field declines and the ramp-up of new projects.
- Assess the exposure to regional natural gas price pressures, particularly in the Americas where realizations decreased 12% in Q4.
- Review the progress of the $7 billion in asset sales and the $5 billion target for 2011 proceeds.
- Monitor the execution of the $25-27 billion capital investment plan for 2011 against cash flow generation.