Business context and reporting period
Royal Dutch Shell plc’s Form 20-F covers the fiscal year ended December 31, 2018, not a standalone 2018 fourth quarter. Shell is a global energy company operating across Integrated Gas, Upstream, Downstream and Corporate. Its consolidated financial statements are prepared under IFRS.
Financial performance and liquidity
Amounts are in US dollars unless stated otherwise. Segment earnings are reported on a current cost of supplies (CCS) basis, a non-IFRS measure.
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $388.4bn | $305.2bn |
| Income for the period | $23.9bn | $13.4bn |
| Income attributable to Shell shareholders | $23.4bn | $13.0bn |
| CCS earnings | $24.4bn | $12.5bn |
| Cash flow from operating activities | $53.1bn | $35.7bn |
| Free cash flow | $39.4bn | $27.6bn |
| Capital investment | $24.8bn | $24.0bn |
| Divestments | $7.1bn | $17.3bn |
| Total debt at year-end | $76.8bn | $85.7bn |
| Net debt at year-end | $51.4bn | $65.9bn |
| Gearing | 20.3% | 25.0% |
| Cash and cash equivalents | $26.7bn | $20.3bn |
Shell did not provide a single consolidated operating-margin figure in the supplied filing text. Revenue growth should be considered alongside the high-volume, lower-margin nature of Downstream sales.
Segment earnings (CCS)
- Integrated Gas: $11.4bn, versus $5.1bn in 2017, helped by higher realised oil, gas and LNG prices, trading contributions and asset-sale gains.
- Upstream: $6.8bn, versus $1.6bn, mainly reflecting higher realised prices, lower impairment charges and fewer well write-offs; lower production partly offset gains.
- Downstream: $7.6bn, versus $8.3bn, as higher costs, weaker refining and chemicals margins, and currency effects outweighed improved marketing margins.
- Corporate: loss of $1.5bn, compared with a $2.4bn loss, mainly due to lower net interest expense and foreign-exchange losses.
Material changes versus 2017
- Revenue rose 27%, income for the period rose 78%, and operating cash flow rose 49%. Higher commodity prices and stronger operating performance were key contributors.
- Production available for sale was essentially flat at 3.666 million barrels of oil equivalent per day. New-project start-ups and ramp-ups were offset by divestments and field declines.
- Shareholder distributions increased: Shell paid $15.7bn in dividends and repurchased $3.9bn of shares in 2018. The scrip dividend programme had ended in 2017.
- Shell completed its 2016–2018 $30bn divestment programme. Divestment proceeds were lower in 2018 than in 2017.
- Proved oil and gas reserves fell to 11.578bn boe from 12.233bn boe. The decline included a substantial reduction in the Shell share of joint-venture and associate reserves, mainly related to Groningen.
Outlook, commentary and risks
- Management said Shell was on track for annual free cash flow of $30bn–$35bn by 2020, assuming Brent at $60 per barrel in 2016 real terms. Capital investment guidance was $25bn–$30bn annually through 2020, with $30bn described as a ceiling.
- Shell expected at least $5bn of divestments annually in 2019 and 2020, and intended to buy back at least $25bn of shares by the end of 2020, subject to debt reduction and oil-price conditions.
- Management expected project start-ups and ramp-ups to add $5bn of operating cash flow between 2018 and 2020, based on the stated oil-price and Downstream assumptions. These outlooks are forward-looking and exclude IFRS 16.
- Shell took final investment decision on LNG Canada, in which it holds 40%; construction began in 2018. It also opened wells at Prelude FLNG during its initial start-up phase.
- Climate strategy: Shell stated ambitions to reduce the Net Carbon Footprint of energy products sold by around 20% by 2035 and 50% by 2050, in step with society. A 2019–2021 target was set at 2%–3% below the 2016 baseline. A methane-intensity target below 0.20% by 2025 also applies to operated Upstream and Integrated Gas assets.
- Key exposures include oil and gas price volatility, project execution and reserve-estimation uncertainty, climate regulation and energy transition, political and fiscal instability, cybersecurity, and health, safety and environmental events. Shell self-insures much of its risk exposure.
- Contingencies include ongoing OPL 245 investigations and litigation in multiple jurisdictions; Shell said it could not practicably estimate any resulting obligation or payment. A Brazilian tax dispute could result in a liability of approximately $3bn if Shell were required to pay. Groningen production restrictions, earthquake damage claims and related obligations remain material matters.
- Two contractors died while working for Shell in 2018. The filing also discusses climate-change lawsuits, Nigeria-related operational and security risks, and other litigation; management cautions that outcomes and financial effects are uncertain.
- IFRS 16 became effective January 1, 2019. Shell estimated recognition of approximately $16bn in lease liabilities and $15.6bn in right-of-use assets at adoption, with negligible equity impact expected.
Most important facts for investors to verify
- Reconcile the reported $23.9bn income and $24.4bn CCS earnings, including identified items, tax effects and the inventory adjustment.
- Assess the durability of $53.1bn operating cash flow and $39.4bn free cash flow, including working-capital effects and commodity-price sensitivity.
- Review net debt, gearing and the maturity profile, and test whether buybacks, dividends and planned investment remain consistent with debt-reduction objectives.
- Examine reserve movements, particularly the Groningen-related reduction, and the assumptions and execution risks behind future production and project cash flows.
- Monitor the OPL 245 proceedings, the potential Brazilian tax liability, Groningen-related obligations, and climate litigation and regulatory developments.
- Check delivery against the 2020 cash-flow, capital-investment and divestment outlooks, and progress on the Net Carbon Footprint and methane targets.
The independent auditor issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting.