Shell Plc Form 6-K Summary: Second Quarter 2009
Business Context and Reporting Period
This Form 6-K reports the unaudited financial results for Royal Dutch Shell plc for the second quarter ended June 30, 2009. The reporting period reflects a challenging global economic environment characterized by weak energy demand, excess market capacity, and significantly lower oil and gas prices compared to the prior year. Management emphasized a strategic shift toward cost reduction, affordability, and operational efficiency through the "Transition 2009" restructuring program.
Key Financial Metrics
| Metric | Q2 2009 | Q2 2008 | Change |
|---|---|---|---|
| Revenue | $63.9 billion | $131.4 billion | -51% |
| CCS Earnings (Current Cost of Supplies) | $2.3 billion | $7.9 billion | -70% |
| Income Attributable to Shareholders | $3.8 billion | $11.6 billion | -67% |
| Basic EPS (Reported) | $0.62 | $1.87 | -67% |
| Basic CCS EPS | $0.38 | $1.28 | -70% |
| Cash Flow from Operating Activities | $0.9 billion | $4.2 billion | -79% |
| Net Capital Investment | $7.8 billion | $7.8 billion | 0% |
| Dividends Paid | $2.9 billion | $2.5 billion | +16% |
| Gearing Ratio | 12.6% | 5.0% | +7.6 pts |
| ROACE (Return on Average Capital Employed) | 8.3% | 25.8% | -17.5 pts |
Note: Cash flow from operating activities was significantly impacted by $3.6 billion in pension contributions and a $2.8 billion increase in working capital. Excluding these items, operating cash flow was $7.4 billion.
Material Changes vs. Prior Period
- Price Realizations: Global liquids realizations fell 53% and global gas realizations fell 47% compared to Q2 2008. Realized oil prices averaged $52.19/bbl in Q2 2009 versus $110.96/bbl in Q2 2008.
- Production Volumes: Total oil and gas production (including oil sands) was 2,960 thousand boe/d, down 5% year-over-year. Crude oil production declined 8% and natural gas production declined 2%. Production in Nigeria dropped significantly due to security challenges.
- Segment Performance:
- Exploration & Production: Earnings fell 77% to $1.3 billion, driven by lower prices and volumes.
- Oil Products: CCS earnings turned to a loss of $255 million from a profit of $1.1 billion, reflecting collapsing refining margins and lower demand.
- Gas & Power: Earnings increased 13% to $705 million, aided by higher trading contributions and new project ramp-ups (Sakhalin II, North West Shelf), despite lower LNG volumes.
- Chemicals: CCS earnings improved to a loss of $18 million from a loss of $142 million, though sales volumes dropped 17%.
- Identified Items: The quarter included a net charge of $810 million, primarily due to fair value accounting for commodity derivatives ($450 million in Oil Products) and asset impairments.
Guidance, Outlook, and Management Commentary
CEO Peter Voser stated that the industry outlook remains challenging with no expectation of a quick recovery. Key strategic points include:
- Cost Reduction: Operating costs were reduced by $0.7 billion in the first half of 2009. The company expects to reduce 2010 organic capital spending by over 10% to approximately $28 billion.
- Restructuring: The "Transition 2009" program aims to simplify the organization, reducing senior management positions by 20% and implementing further staff reductions.
- Investment Strategy: Shell is maintaining a competitive upstream program to build 1 million boe/d of additional capacity, with new start-ups in Brazil (Parque das Conchas) and Russia (Sakhalin II).
- Dividend: A Q2 2009 dividend of $0.42 per share was announced, a 5% increase over the same period in 2008.
- Risks: Significant risks cited include security situations in Nigeria, price fluctuations in crude oil and gas, currency fluctuations, and regulatory developments.
Investor Verification Checklist
- Working Capital Impact: Verify the sustainability of the $2.8 billion increase in working capital and its effect on future cash flow.
- Pension Obligations: Assess the long-term impact of the $3.6 billion cash contribution to pension plans and the associated non-cash charges.
- Derivative Accounting: Review the $450 million charge related to fair value accounting of commodity derivatives to understand the timing differences between physical inventory and derivative valuations.
- Nigeria Operations: Monitor the security situation in Nigeria, which caused a significant drop in production (from ~210k to ~120k boe/d Shell share) and LNG volumes.
- Refining Margins: Track industry refining margins, which were at historic lows (e.g., Rotterdam Brent complex at $1.65/bbl), impacting the Oil Products segment's ability to generate profit.