Business context and reporting period
Royal Dutch Shell plc’s Form 20-F is an annual report for the fiscal year ended December 31, 2017—not a standalone fourth-quarter filing. Shell is a global integrated energy company reporting under IFRS. Its principal segments are Integrated Gas, Upstream, Downstream and Corporate. Unless otherwise noted, amounts are in US dollars.
Financial and operating performance
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $305.2 billion | $233.6 billion |
| Income for the period | $13.4 billion | $4.8 billion |
| Income attributable to Shell plc shareholders | $13.0 billion | $4.6 billion |
| Basic earnings per share | $1.58 | $0.58 |
| CCS earnings, a non-GAAP measure | $12.5 billion | $3.7 billion |
| Cash flow from operating activities | $35.7 billion | $20.6 billion |
| Free cash flow, as defined by Shell | $27.6 billion | $(10.3) billion |
| Cash flow from investing activities | $(8.0) billion | $(31.0) billion |
| Cash flow from financing activities | $(27.1) billion | $(0.8) billion |
| Capital investment | $24.0 billion | $79.9 billion |
| Divestments | $17.3 billion | $5.0 billion |
| Total debt | $85.7 billion | $92.5 billion |
| Net debt | $65.4 billion | $73.3 billion |
| Gearing | 24.8% | 28.0% |
| Cash and cash equivalents | $20.3 billion | $19.1 billion |
| Return on average capital employed | 5.8% | 3.0% |
| Oil and gas production available for sale | 3.664 million boe/d | 3.668 million boe/d |
| Proved oil and gas reserves | 12.233 billion boe | 13.248 billion boe |
CCS earnings exclude the after-tax effect of changes in oil prices on inventory carrying amounts; they are not IFRS net income. The filing does not provide a clear consolidated profit-margin figure. Shell paid $10.9 billion in cash dividends to shareholders in 2017; total shareholder distributions through dividends, including scrip shares, were reported as $15.6 billion. The announced dividend was $1.88 per share for 2017.
Material changes versus 2016
- Revenue rose about 31%, while income for the period and CCS earnings increased substantially. Management attributed stronger results mainly to higher oil and gas prices and improved refining and chemicals conditions.
- Integrated Gas CCS earnings increased to $5.1 billion from $2.5 billion; Upstream moved to $1.6 billion of earnings from a $3.7 billion loss; Downstream earnings rose to $8.3 billion from $6.6 billion. Corporate’s loss widened to $2.4 billion from $1.8 billion, mainly due to higher interest expense and foreign-exchange losses.
- Operating cash flow increased by $15.0 billion. Free cash flow improved from a $10.3 billion outflow to a $27.6 billion inflow. Investing outflow was lower primarily because 2016 included the BG acquisition and 2017 had higher asset-sale proceeds.
- Capital investment fell sharply from 2016, which included $52.9 billion related to BG. Excluding inorganic investment, 2017 organic capital investment was $22.2 billion versus $26.9 billion.
- Divestments increased to $17.3 billion, including major Upstream sales. Production was broadly flat as new-project output offset declines and divestments. Proved reserves fell by 1.015 billion boe after production, with major synthetic crude oil reserve sales contributing to the change.
Outlook, commentary, risks and unusual items
- Management forecast annual organic capital investment of $25–30 billion through 2020, with $30 billion a ceiling and 2018 investment expected in the lower part of the range. It targeted operating expenses below $38 billion annually through at least 2020, subject to stated portfolio and other exclusions.
- Shell raised its 2020 annual free-cash-flow outlook to $30–35 billion at Brent of $60 per barrel in 2016 real terms. The outlook includes acquisition and divestment proceeds and excludes free cash flow from assets after planned divestments. Shell also stated an intention to conduct at least $25 billion of buybacks in 2017–2020, conditional on debt reduction and oil-price recovery.
- The $30 billion 2016–2018 divestment programme continued; Shell expected average divestments of at least $5 billion annually during 2019–2020. New Energies investment was expected to average $1–2 billion a year through 2020.
- 2017 results included approximately $4.6 billion of impairment losses and a $2.0 billion income-statement charge associated with US tax reform, partly offset by divestment gains. Upstream reported $2.6 billion of impairment charges, mainly related to assets being divested.
- Key risks include volatile commodity prices, project delivery and reserve-estimation uncertainty, regulatory and climate-transition impacts, political and security risks, litigation, pension funding, and liquidity, currency, interest-rate and counterparty exposures. Shell noted climate-change lawsuits brought by US municipalities and ongoing investigations and proceedings concerning Nigerian oil block OPL 245; management said outcomes were uncertain and potential obligations could not practicably be estimated.
- Shell reported a fatal contractor tanker accident in Pakistan in June 2017, in which more than 200 people died. It also reported higher operational spills (99 versus 72 in 2016) and more Tier 1 and 2 process-safety events (166 versus 146). Direct greenhouse-gas emissions rose to 73 million tonnes of CO2 equivalent from 70 million, partly due to the Motiva asset changes and the return of Bukom units to production.
- The consolidated financial statements received an unqualified audit opinion. Management reported effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- Reconcile reported IFRS income, CCS earnings and free cash flow, including the treatment of identified items, working capital, divestments and acquisition-related effects.
- Assess whether debt and gearing reduction can continue while Shell funds dividends, planned investment and the conditional buyback programme; review debt maturities and the $8.5 billion undrawn committed credit facility.
- Test the assumptions underpinning the 2020 cash-flow, cost, capital-investment and divestment outlook against oil and gas prices, execution and portfolio changes.
- Review the reserve decline, replacement and maturation of undeveloped reserves, and the effect of asset sales and commodity-price assumptions on future production and cash generation.
- Track material legal and contingent exposures, especially OPL 245, Nigerian disputes, climate litigation, Groningen seismicity and decommissioning obligations.