Business Context and Reporting Period
This Form 6-K filing by Royal Dutch Shell plc, dated January 7, 2022, provides an update to the fourth quarter 2021 outlook. The document outlines expected performance metrics for Q4 2021, noting that actual results are subject to finalization and will be published on February 3, 2022. The filing also details a strategic decision made on December 31, 2021, to distribute the remaining $5.5 billion of proceeds from the Permian divestment via share buybacks, in addition to the existing capital allocation framework of distributing 20-30% of cash flow from operations.
Key Financial Metrics and Segment Outlook
The filing provides forward-looking ranges for Adjusted EBITDA, production volumes, operating expenses, and cash flows across key business segments. All figures exclude identified items unless otherwise noted.
- Integrated Gas: Adjusted EBITDA production expected between 910 and 950 thousand barrels of oil equivalent per day (boe/d). LNG liquefaction volumes between 7.7 and 8.3 million tonnes. Underlying Opex expected between $1.6 and $1.8 billion. Trading and optimization results are projected to be significantly higher than Q3 2021 due to high LNG spot prices.
- Upstream: Production expected between 2,150 and 2,250 thousand boe/d. Underlying Opex between $2.7 and $3.0 billion. Taxation charge expected between $2.4 and $2.8 billion.
- Oil Products: Indicative refining margin around $6.55/bbl (up from $5.70/bbl in Q3 2021). Refinery utilization expected between 69% and 73%. Sales volumes between 4.0 and 5.0 million barrels per day. Underlying Opex between $3.4 and $3.8 billion. Refining and Trading Adjusted Earnings are expected to be negative despite higher margins, impacted by turnarounds and Hurricane Ida recovery.
- Chemicals: Margins and JV earnings expected to be significantly lower than Q3 2021 due to weaker base chemicals margins. Plant utilization between 74% and 78%. Adjusted Earnings expected to be around break-even.
- Corporate: Adjusted Earnings expected to be a net expense of $900 to $1,000 million, including $150 million in charges for early debt redemption and up to $100 million in deferred tax charges.
Cash Flow and Liquidity: Cash flow from operations (CFFO) excluding working capital is expected to face significant outflows in Integrated Gas due to variation margin impacts from gas and electricity price volatility. Oil Products CFFO is expected to be impacted by approximately $1 billion in outflows related to emission scheme payments and another $1 billion in working capital outflows due to the German Mineral Oil Tax.
Material Changes Versus Prior Period
Several material changes are highlighted relative to the third quarter of 2021:
- Integrated Gas Trading: Expected to be significantly higher than Q3 2021, driven by the high LNG spot price environment and optimization opportunities.
- Oil Products Marketing: Expected to be lower than Q3 2021 due to seasonal trends, demand impacts from the Omicron virus, and foreign exchange impacts in Turkey.
- Oil Products Trading: Expected to be significantly lower than Q3 2021.
- Chemicals: Margins and earnings expected to be significantly lower than Q3 2021 due to weaker base chemicals margins and lower utilization rates.
- Refining Margins: Indicative refining margin increased to $6.55/bbl from $5.70/bbl in Q3 2021, though realized margins are expected to be adversely impacted by operational disruptions.
Guidance, Risks, and Unusual Items
Capital Allocation: The company confirmed the distribution of the remaining $5.5 billion from the Permian divestment via share buybacks. The pace and total amount of shareholder distributions will be disclosed in the Q4 results announcement.
Unusual Items and Risks:
- Operational Disruptions: Production and liquefaction volumes were impacted by unplanned maintenance, primarily in Australia. Refinery utilization and Chemicals margins were affected by Hurricane Ida recovery efforts in the US Gulf Coast and extended turnarounds in Scotford.
- Market Volatility: Significant outflows in CFFO are anticipated due to variation margin impacts from unprecedented gas price volatility at the end of Q4 2021.
- Debt Redemption: Corporate segment includes charges associated with the early redemption of $4.5 billion in debt.
- Forward-Looking Statements: The filing includes standard disclaimers regarding risks such as price fluctuations in crude oil and natural gas, demand changes, currency fluctuations, regulatory developments regarding climate change, and the impact of pandemics.
Key Facts for Investor Verification
- Verify the final Q4 2021 results published on February 3, 2022, to confirm if the projected ranges for production, margins, and earnings were met.
- Monitor the execution and pace of the $5.5 billion share buyback program funded by Permian divestment proceeds.
- Assess the actual impact of variation margin outflows on cash flow from operations given the high gas price volatility.
- Review the reconciliation of non-GAAP measures (Adjusted Earnings, Adjusted EBITDA) to GAAP measures once final results are released, as the filing notes a reconciliation cannot be provided for forward-looking estimates.
- Track the recovery of refinery utilization and Chemicals margins following the disruptions from Hurricane Ida and planned turnarounds.