Business Context and Reporting Period
Company: Royal Dutch Shell plc
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Second Quarter and Half Year ended June 30, 2010
Filing Date: July 29, 2010
Context: The filing presents unaudited interim results reflecting strong recovery in earnings driven by higher commodity prices and production volumes. The company completed its "Transition 2009" restructuring program, achieving over $3.5 billion in annualized cost savings ahead of schedule.
Key Financial Metrics
| Metric ($ millions) | Q2 2010 | Q2 2009 | Half Year 2010 | Half Year 2009 |
|---|---|---|---|---|
| CCS Earnings | 4,529 | 2,340 | 9,426 | 5,637 |
| Income Attributable to Shareholders | 4,393 | 3,822 | 9,874 | 7,310 |
| Basic EPS ($) | 0.72 | 0.62 | 1.61 | 1.19 |
| Cash Flow from Operating Activities | 8,096 | 919 | 12,878 | 8,478 |
| Net Capital Investment | 5,600 | 5,139 (Upstream only) | 11,800 | 14,500 |
| Dividends Paid | 2,400 | 2,852 (Q2 2009) | 5,003 | 5,257 |
| Gearing Ratio | 16.9% | 12.6% | N/A | N/A |
| Total Debt | 40,301 | 30,100 (Jun 2009) | N/A | N/A |
Note: CCS = Current Cost of Supplies. Net Capital Investment for Q2 2010 is $5.6 billion total. Half-year Net Capital Investment was $11.8 billion.
Material Changes vs. Prior Period
- Earnings Growth: Q2 2010 CCS earnings increased 94% year-over-year to $4.5 billion. Half-year earnings rose 67% to $9.4 billion.
- Upstream Performance: Earnings rose 56% in Q2 to $3.3 billion, driven by a 41% increase in global liquids realizations and a 12% increase in natural gas production. Oil and gas production increased 5% to 3,110 thousand boe/d.
- Downstream Turnaround: CCS earnings swung from a loss of $275 million in Q2 2009 to a profit of $1.5 billion in Q2 2010, aided by improved refining margins and an 18% increase in chemicals sales volumes.
- Cash Flow: Operating cash flow surged 781% in Q2 to $8.1 billion, compared to $0.9 billion in Q2 2009, largely due to higher earnings and working capital management.
- Debt Levels: Total debt increased to $40.3 billion at June 30, 2010, from $30.1 billion a year earlier, following the issuance of $7 billion in new debt.
Guidance, Outlook, and Risks
Management Commentary
CEO Peter Voser highlighted that the company is "on track for growth" with a 5% increase in oil and gas production and significant volume increases in LNG and chemicals. The "Transition 2009" restructuring is complete, delivering cost savings 15% above target. Management expects $7-8 billion in asset sales during 2010-2011 to refocus the portfolio.
Outlook and Guidance
- Dividends: A Q2 dividend of $0.42 per share was declared. The Board intends to introduce an optional Scrip Dividend Programme for Q3 2010.
- Production: New project start-ups, including Gbaran-Ubie in Nigeria, are underpinning cash flow and production growth targets for 2012.
- Market Conditions: Management notes mixed signals in the global economy. While oil prices remain firm, refining margins and natural gas spot prices face pressure.
Risks and Contingencies
- Regulatory/Legal: Shell is under investigation by the SEC and US Department of Justice regarding violations of the Foreign Corrupt Practices Act.
- Operational: Risks include the impact of the BP Macondo blow-out on deepwater operations, though Shell is participating in a $1 billion containment system initiative.
- Geopolitical: Operations in Nigeria, Iran, and Syria expose the company to political instability and potential sanctions.
- Market: Fluctuations in crude oil, natural gas, and chemical prices remain a primary risk to financial condition.
Investor Verification Checklist
- Asset Sales: Verify the execution of the planned $7-8 billion in asset disposals for 2010-2011 to confirm capital efficiency targets.
- Debt Maturity: Review the maturity profile of the $7 billion in new debt issued in H1 2010 to assess refinancing risks.
- Regulatory Investigations: Monitor updates regarding the ongoing SEC and DOJ investigations into FCPA violations.
- Production Volumes: Track the ramp-up of new projects (e.g., Gbaran-Ubie, Perdido) to ensure they meet the 2012 growth targets.
- Downstream Margins: Watch for volatility in refining margins and chemical spreads, which management cites as currently under pressure.