Business Context and Reporting Period
This Form 6-K filing by Royal Dutch Shell plc, dated December 21, 2020, provides an update to the fourth quarter 2020 outlook previously announced in October 2020. The document outlines expected operational and financial performance for the quarter ending December 31, 2020, based on prevailing commodity prices and forward curves. It serves as a forward-looking statement subject to finalization of actual results.
Key Financial Metrics and Operational Outlook
The filing provides specific ranges for production, utilization, and financial impacts across business segments, though it does not provide a consolidated revenue or profit figure for the quarter.
- Integrated Gas: Production expected between 900 and 940 thousand barrels of oil equivalent per day (boepd). LNG liquefaction volumes between 8.0 and 8.6 million tonnes. Trading results expected to be below average.
- Upstream: Adjusted Earnings expected to show a loss. Production expected between 2,275 and 2,350 thousand boepd. Depreciation expected to be $100 to $200 million higher than Q3 2020. A tax charge of $600 to $900 million is expected.
- Oil Products: Refinery utilization expected between 72% and 76%. Sales volumes between 4,000 and 5,000 thousand barrels per day. Gross refining margins expected to improve slightly versus Q3 2020.
- Chemicals: Plant utilization expected between 77% and 81%. Sales volumes between 3,600 and 3,900 thousand tonnes. Margins expected to improve versus Q3 2020.
- Corporate: Adjusted Earnings expected to be a net expense of $900 to $975 million.
- Identified Items: Post-tax charges between $3.5 and $4.5 billion expected for impairments, asset restructuring, and onerous contracts.
- Cash Flow: Cash Flow from Operations (CFFO) negatively impacted by margining outflows in Integrated Gas and Oil Products, and settlement of provisions in Upstream ($400 to $500 million).
Material Changes Versus Prior Period
Several segments anticipate declines or specific deviations compared to the third quarter of 2020:
- Upstream: Adjusted Earnings are expected to move to a loss, driven by the current price environment and a significant tax charge ($600–$900 million). Depreciation is expected to increase by $100–$200 million.
- Oil Products: Marketing results are expected to be significantly lower than the record Q3 2020 due to seasonal volume declines. Trading and optimization results are also expected to be significantly lower.
- Cash Flow: Significant derivatives and margining outflows in Q4 contrast with inflows seen at the end of Q3 2020.
- Production: Upstream production reflects hurricane impacts in the US Gulf of Mexico (60–70 thousand boepd reduction) and mild weather in Northern Europe.
Guidance, Risks, and Unusual Items
Management highlights several material risks and unusual items affecting the fourth quarter:
- Impairments and Restructuring: Aggregate post-tax charges of $3.5 to $4.5 billion are expected. These include partial impairment of the Appomattox asset (Upstream), refinery portfolio transformation charges (Oil Products), and onerous contracts (Integrated Gas).
- Tax Impacts: Unfavorable movements in deferred tax positions are expected to negatively impact Adjusted Earnings in both Upstream and Corporate segments.
- Price Sensitivity: CFFO price sensitivity is estimated at $6 billion per annum for each $10 per barrel Brent price movement, though this is noted as indicative and most applicable to smaller price changes.
- Future Strategy: Shell will provide a strategy update on February 11, 2021. Charges linked to the "Reshape" organizational restructuring are expected to be recognized in 2021.
- Risks: Key risks include commodity price volatility, currency fluctuations, regulatory developments regarding climate change, and the ongoing impact of the COVID-19 pandemic.
Investor Verification Checklist
- Verify the final magnitude of the $3.5 to $4.5 billion in post-tax charges related to impairments and restructuring upon the release of full Q4 results.
- Confirm the actual impact of the $600 to $900 million tax charge and deferred tax movements on the final Adjusted Earnings.
- Monitor the final CFFO figures to assess the net impact of margining outflows and provision settlements versus the Q3 inflows.
- Review the February 11, 2021 strategy update for details on the "Reshape" restructuring and future capital allocation.
- Assess the realization of the projected production ranges for Upstream and Integrated Gas against actual operational data.