Shell Reports on Challenging Quarter, Sharpens Focus for Beyond 2009
2nd Quarter 2009 Unaudited Results
- Royal Dutch Shell's second quarter 2009 earnings, on a current cost of supplies (CCS) basis, were $2.3 billion compared to $7.9 billion a year ago. Basic CCS earnings per share decreased by 70% versus the same quarter a year ago.
- Cash flow from operating activities for the second quarter 2009 was $0.9 billion, including $3.6 billion of cash contributions to pension plans and a $2.8 billion increase in working capital.
- Net capital investment for the quarter was $7.8 billion. Total cash returned to shareholders in the form of dividends was $2.9 billion.
- A second quarter 2009 dividend has been announced of $0.42 per share, an increase of 5% over the US dollar dividend per share for the same period in 2008.
Key features of the SECOND quarter 2009
Royal Dutch Shell Chief Executive Officer Peter Voser commented, "Our second quarter results were affected by the weak global economy. This weakness is creating a difficult environment both in Upstream and Downstream. Energy demand is weak. There is excess capacity in the market, and industry costs remain high.
"Conditions are likely to remain challenging for some time, and we are not banking on a quick recovery. Shell is adapting to this new situation, and we must do more. We are sharpening our focus on delivery and affordability.
"We are in the middle of a program to build 1 million barrels of oil equivalent per day (boe) of additional Upstream capacity, with selective Downstream investment.
"New production start-ups in the first half 2009, at Sakhalin II in Russia, and Parque das Conchas (BC-10) in Brazil, are important milestones in the delivery of this strategy. This is the most competitive program in our industry, and managing affordability in today's climate is a key priority for Shell.
"Taking new steps to reduce our costs, combined with Shell's financing capabilities, allows us to continue with our investments for medium term shareholder value, despite today's tough market conditions.
"Shell has a number of initiatives underway to reduce costs. Through a combination of self-help, reduced supply-chain costs, and lower discretionary spending, we have reduced operating costs by $0.7 billion in the first half 2009, compared to the first half 2008. This reduction excludes the impact of exchange rate movements and non-cash pension costs. We expect to reduce 2010 organic capital spending by over 10% compared to 2009 levels, to around $28 billion.
A new restructuring program -- called 'Transition 2009' -- which we announced in June, will be completed by the end of this year. This will simplify Shell, and increase personal accountabilities. The top 600 management positions in the new organization have been announced. This has enabled us to reduce the number of senior management positions by 20%, and substantial further staff reductions are likely.
"Looking beyond 2009, Shell needs to become a more efficient company, with faster decision-making, sharper implementation of strategy, and more focus on costs and value. The 'Transition 2009' program is the beginning of that change.
"Further out, beyond 2012, we have an industry-leading Upstream option set that can deliver growth to 2020. In addition, we continue to find new fields through exploration. The 6 notable discoveries in the first half of 2009 contribute to at least 0.7 billion boe of new resources potential.
"We are keeping our pre-FID options warm, but managing affordability and profitability are key priorities. The industry outlook remains a challenging one, despite the rally in oil prices in recent months. We are taking steps to improve our performance, to bridge the company, and our shareholders, into a period of significant growth in the coming years."
- Cash flow from operating activities for the second quarter 2009 was $0.9 billion, compared to $4.2 billion in the same quarter last year. Excluding cash contributions to pension plans of $3.6 billion and net working capital movements of $2.8 billion, cash flow from operating activities was $7.4 billion in the second quarter 2009, compared to $16.1 billion, on the same basis, for the second quarter 2008.
- Capital investment for the second quarter 2009 was $8.1 billion. Net capital investment (capital investment, less divestment proceeds) for the second quarter 2009 was $7.8 billion.
- Return on average capital employed (ROACE), on a reported income basis (see Note 3), was 8.3%.
- Gearing was 12.6% at the end of the second quarter 2009 versus 5.0% at the end of the second quarter 2008.
- Oil and gas production, including oil sands production, for the second quarter 2009 was 2,960 thousand barrels of oil equivalent per day (boe/d). Security in Nigeria remains a significant challenge. Excluding the impact of the security situation in Nigeria, divestments, production sharing contracts (PSC) pricing effects and OPEC quota restrictions, production was broadly similar to the same quarter last year.
- Liquefied Natural Gas (LNG) sales volumes of 2.89 million tonnes were 6% lower than in the same quarter a year ago. Excluding the impact of the security situation in Nigeria, LNG sales volumes were 7% higher than in the same quarter last year.
- Exploration & Production earnings included a net charge of $109 million, reflecting a charge of $389 million related to the mark-to-market valuation of certain UK gas contracts and a charge of $19 million related to a retirement healthcare plan modification in the USA. These charges were partly offset by a gain related to a lease litigation settlement of $229 million and a divestment gain of $70 million. Earnings for the second quarter 2008 included a net gain of $98 million.
Second quarter Exploration & Production segment earnings were $1,334 million compared to $5,881 million a year ago. Earnings included a net charge of $109 million related to identified items, compared to a net gain of $98 million in the second quarter 2008.
Earnings compared to the second quarter 2008 reflected the impact of significantly lower oil and gas prices on revenues, lower oil and gas production volumes, higher exploration expenses and non-cash pension charges, which were partly offset by lower royalty and tax expenses.
Although oil prices increased during the quarter, realized natural gas prices remained at low levels mainly due to contractual lag effects.
European gas demand declined in the second quarter 2009, impacting natural gas production compared to the second quarter 2008.
Global liquids realizations were 53% lower than in the second quarter 2008. Global gas realizations were 47% lower than a year ago. Outside the USA, gas realizations decreased by 39% whereas in the USA gas realizations decreased by 68%.
Second quarter 2009 production (excluding oil sands bitumen production) was 2,882 thousand boe/d compared to 3,054 thousand boe/d a year ago. Crude oil production was down 8% and natural gas production was down 2% compared to the second quarter 2008.
In Nigeria, the security situation remains a significant challenge. As a consequence, The Shell Petroleum Development Company of Nigeria Ltd's (SPDC) onshore and shallow water oil and gas production declined from some 210 thousand boe/d (Shell share) in the second quarter 2008 to approximately 120 thousand boe/d (Shell share) in the second quarter 2009.
Underlying production, compared to the second quarter 2008, increased by some 210 thousand boe/d from new field start-ups and the continuing ramp-up of fields over the last 12 months, more than offsetting field declines.
Second quarter portfolio developments
During the first half of 2009, Shell made 6 notable discoveries in the US Gulf of Mexico, Australia, Malaysia and Norway. Shell also increased its overall acreage position through acquisitions of new exploration licences in Guyana, Italy, Brazil, USA, Norway, Egypt and Jordan.
In Brazil, on July 13, 2009, production started from the multi-field Parque das Conchas (BC-10) project (Shell share 50%). Production wells, which are some 2 kilometers deep, are linked to a Floating Production, Storage and Offloading (FPSO) vessel with a capacity to process 100 thousand barrels of oil and 50 million cubic feet of natural gas a day (100% basis).
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