Gulf Oil and Gas accountACCOUNT

2nd Quarter 2020 & Half Year Unaudited Results

Source: www.gulfoilandgas.com 7/30/2020, Location: Europe

Income attributable to Royal Dutch Shell plc shareholders was a loss of $18.1 billion for the second quarter 2020, which included an impairment charge of $16.8 billion post-tax ($22.3 billion pre-tax), as a result of revised medium- and longterm price and refining margin outlook assumptions in response to the COVID-19 pandemic and macroeconomic conditions as well as energy market demand and supply fundamentals. Second quarter 2020 results reflected lower realised prices for oil, LNG and gas, lower realised refining margins, Oil Products sales volumes and higher well write-offs, compared with the second quarter 2019. This was partly offset by very strong crude and oil products trading and optimisation results as well as lower operating expenses.

Adjusted Earnings were $0.6 billion for the second quarter 2020, reflecting lower realised prices for oil, LNG and gas, lower realised refining margins, Oil Products sales volumes and higher well write-offs, compared with the second quarter 2019. This was partly offset by very strong crude and oil products trading and optimisation results as well as lower operating expenses.

Cash flow from operating activities for the second quarter 2020 was $2.6 billion, which included negative working capital movements of $4 billion. Cash flow from investing activities for the quarter was an outflow of $2.3 billion, driven mainly by capital expenditure, partly offset by proceeds from divestments.

Gearing was 32.7% at the end of the second quarter 2020, compared with 28.9% at the end of the first quarter 2020, mainly driven by the impact of impairments and pension remeasurement, due to actuarial assumption changes mainly caused by falling credit spreads and increasing market estimates of future inflation, as well as a net debt increase in the quarter.

Total dividends distributed to Royal Dutch Shell plc shareholders in the quarter were $1.2 billion.

Integrated Gas
During the quarter, all conditions were met for the Final Investment Decision (FID) and contracts were awarded on a new LNG processing unit, known as Train 7, at Nigeria LNG (Shell interest 25.6%), which will add 8 million tonnes per annum (mtpa) of capacity to the Bonny Island facility.

Upstream
During the quarter, Shell reached an agreement to sell its Appalachia shale gas position for $541 million, subject to closing adjustments, with an effective date of January 1, 2020, and expected to close in the third quarter 2020.

Performance by Segment
Integrated Gas
Second quarter segment earnings were a loss of $7,959 million. This included a post-tax impairment charge of $8,151 million mainly related to the Queensland Curtis LNG and Prelude floating LNG operations in Australia. Also included was a net charge of $265 million due to the fair value accounting of commodity derivatives. These net charges are part of identified items.

Compared with the second quarter 2019, Integrated Gas Adjusted Earnings of $362 million primarily reflected lower realised prices for oil, LNG and gas, unfavourable movements in deferred tax positions and a charge of $403 million reflecting well write-offs for the second quarter, partly offset by lower operating expenses and higher contributions from trading and optimisation.

Cash flow from operating activities for the quarter was $2,663 million, primarily driven by Adjusted Earnings before noncash expenses including depreciation, well write-offs and deferred tax charges.

Compared with the second quarter 2019, total production decreased by 2% mainly due to more maintenance activities in Australia and lower demand, partly offset by the transfer of the Rashpetco operations in Egypt from the Upstream segment. LNG liquefaction volumes decreased mainly as a result of cargo timing.

Half year segment earnings were a loss of $6,147 million. This included a post-tax impairment charge of $8,210 million mainly related to the Queensland Curtis LNG and Prelude floating LNG operations in Australia. Also included was a net charge of $419 million due to the fair value accounting of commodity derivatives. These net charges are part of identified items.

Compared with the first half 2019, Integrated Gas Adjusted Earnings of $2,506 million primarily reflected lower realised prices for oil, LNG and gas, higher well write-offs and higher depreciation, partly offset by higher volumes and lower operating expenses.

Cash flow from operating activities for the first half 2020 was $6,649 million, primarily driven by Adjusted Earnings before non-cash expenses including depreciation and well write-offs.

Compared with the first half 2019, total production increased by 5% mainly due to less maintenance activities, new fields and field ramp-ups, as well as the transfer of the Rashpetco operations in Egypt from the Upstream segment. LNG liquefaction volumes decreased mainly as a result of cargo timing and lower feedgas availability, partly offset by less maintenance activities and new capacity.

Upstream
Second quarter segment earnings were a loss of $6,721 million. This included a post-tax impairment charge of $4,658 million mainly related to unconventional assets in North America, assets offshore in Brazil and Europe, a project in Nigeria (OPL245), and an asset in the US Gulf of Mexico. Also included were a net charge of $187 million mainly related to a reduction in discount rate used for provisions, as well as redundancy and restructuring costs of $183 million. These net charges are part of identified items.

Compared with the second quarter 2019, Upstream Adjusted Earnings were a loss of $1,512 million primarily reflecting lower realised oil and gas prices.

Cash flow from operating activities for the second quarter 2020 was $319 million, primarily driven by Adjusted Earnings before non-cash expenses including depreciation, as well as the cash impact of the settlement for the Lula unitisation in Brazil and cash effect of tax.

Compared with the second quarter 2019, total production decreased by 7%, mainly due to the challenging macroeconomic environment (which included OPEC+ restrictions and COVID-19-related restrictions), the impact of divestments and lower production in the NAM joint venture. Field ramp-ups in the Santos Basin, Brazil, the US Gulf of Mexico and Permian, USA more than offset field decline. Lower production volumes were offset by favourable timing of entitlement liftings.

Half year segment earnings were a loss of $7,584 million. This included a post-tax impairment charge of $5,074 million mainly related to unconventional assets in North America, assets offshore in Brazil and Europe, a project in Nigeria (OPL245), and an asset in the US Gulf of Mexico. Also included were a net charge of $916 million related to the impact of the weakening Brazilian real on a deferred tax position, and redundancy and restructuring costs of $191 million. These net charges are part of identified items.

Compared with the first half 2019, Upstream Adjusted Earnings were a loss of $1,220 million primarily reflecting lower realised oil and gas prices and lower gas volumes.

Cash flow from operating activities for the first half 2020 was $5,926 million, primarily driven by Adjusted Earnings before non-cash expenses including depreciation, as well as positive working capital movements, cash effect of tax and the settlement for the Lula unitisation in Brazil.

Compared with the first half 2019, total production decreased by 6%, mainly due to the impact of divestments, lower production in the NAM joint venture and the challenging macroeconomic environment (which included OPEC+ restrictions and COVID-19-related restrictions). Field ramp-ups in the Santos Basin, Brazil, the US Gulf of Mexico and Permian, USA, more than offset field decline.

Oil Products
Second quarter segment earnings were a loss of $3,023 million. This included a post-tax impairment charge of $4,027 million, as a result of revised medium- and long-term price outlook assumptions in response to the energy market demand and supply fundamentals as well as the COVID-19 pandemic and macroeconomic conditions. Also included were a net charge of $1,257 million due to the fair value accounting of commodity derivatives, and redundancy and restructuring costs of $118 million. These net charges are part of identified items.

Compared with the second quarter 2019, Oil Products Adjusted Earnings of $2,411 million for the quarter reflected very strong contributions from crude and oil products trading and optimisation as well as lower operating expenses. This was partly offset by lower realised refining margins and lower marketing sales volumes due to the weak macroeconomic environment and COVID-19 pandemic.

Cash flow from operating activities for the second quarter 2020 was an outflow of $362 million, primarily driven by Adjusted Earnings before depreciation, as well as negative working capital movements and cash outflows from commodity derivatives.

With effect from the first quarter 2020, certain Oil Products contracts are no longer included in sales volumes. Excluding this impact, Oil Products sales volumes decreased due to lower refining & trading and marketing sales volumes, compared with the second quarter 2019.

? Refining & Trading Adjusted Earnings reflected very strong contributions from crude and oil products trading and optimisation as well as lower operating expenses. This was partly offset by lower realised refining margins, compared with the second quarter 2019.

With effect from the first quarter 2020, Shell discloses utilisation instead of availability to improve transparency on refinery production volumes. Utilisation is defined as the actual usage of the plants as a percentage of the rated capacity.

Refinery utilisation was 70% compared with 76% in the second quarter 2019, mainly due to lower demand and economic optimisation.

? Marketing Adjusted Earnings reflected lower sales volumes, partly offset by lower operating expenses, compared with the second quarter 2019.

Half year segment earnings were a loss of $811 million. This included a post-tax impairment charge of $4,088 million, as a result of revised medium- and long-term price outlook assumptions in response to the energy market demand and supply fundamentals as well as the COVID-19 pandemic and macroeconomic conditions. Also included were a net charge of $291 million due to the fair value accounting of commodity derivatives, and redundancy and restructuring costs of $117 million.

Compared with the first half 2019, Oil Products Adjusted Earnings of $3,774 million reflected very strong contributions from crude and oil products trading and optimisation as well as lower operating expenses. This was partly offset by lower realised refining margins and lower marketing sales volumes due to the weak macroeconomic environment and COVID-19 pandemic.

Cash flow from operating activities for the first half 2020 was $4,516 million, primarily driven by Adjusted Earnings before depreciation, and positive working capital movements. This was partly offset by cost-of-sales adjustments for the first half 2020.

With effect from the first quarter 2020, certain Oil Products contracts are no longer included in sales volumes. Excluding this impact, Oil Products sales volumes decreased due to lower refining & trading and marketing sales volumes, compared with the first half 2019.

? Refining & Trading Adjusted Earnings reflected very strong contributions from crude and oil products trading and optimisation as well as lower operating expenses. This was partly offset by lower realised refining margins, compared with the first half 2019.

With effect from the first quarter 2020, Shell discloses utilisation instead of availability to improve transparency on refinery production volumes. Utilisation is defined as the actual usage of the plants as a percentage of the rated capacity.

Refinery utilisation was 75% compared with 78% in the first half 2019, mainly due to lower demand and economic optimisation.

? Marketing Adjusted Earnings reflected lower sales volumes, partly offset by lower operating expenses and higher realised global commercial and retail margins, compared with the first half 2019.

Chemiclas
Second quarter segment earnings were $164 million. This included redundancy and restructuring costs of $30 million, which are part of identified items.

Compared with the second quarter 2019, Chemicals Adjusted Earnings of $206 million reflected lower operating expenses, partly offset by lower realised margins due to chemicals downcycle conditions compounded by COVID-19 pandemic.

Cash flow from operating activities for the quarter was $734 million, primarily driven by Adjusted Earnings before depreciation, as well as positive working capital movements due to positive movements in receivables and payables. This was partly offset by higher cost-of-sales adjustments for the quarter.

With effect from the first quarter 2020, Shell discloses utilisation instead of availability to improve transparency on chemicals production volumes. Utilisation is defined as the actual usage of the plants as a percentage of the rated capacity. Chemicals manufacturing plant utilisation was 78% compared with 73% in the second quarter 2019, mainly due to higher maintenance activities in Asia and Europe in 2019, as well as the impact of strike actions in the Netherlands last year.

Half year segment earnings were $311 million. This included redundancy and restructuring costs of $31 million, which are part of identified items.

Compared with the first half 2019, Chemicals Adjusted Earnings of $354 million reflected lower realised margins due to chemicals downcycle conditions compounded by COVID-19.

Cash flow from operating activities was an inflow of $556 million, primarily driven by Adjusted Earnings before depreciation. This is partly offset by cost-of-sales adjustments for the first half 2020.

With effect from the first quarter 2020, Shell discloses utilisation instead of availability to improve transparency on chemicals production volumes. Utilisation is defined as the actual usage of the plants as a percentage of the rated capacity. Chemicals manufacturing plant utilisation was 81% compared with 78% in the first half 2019, mainly due to higher maintenance activities in Asia and Europe in 2019, including the impact of strike actions in the Netherlands last year.

Corporate
Second quarter segment earnings were an expense of $805 million. This included a post-tax impairment charge of $5 million, as a result of macroeconomic conditions. This net charge is part of identified items.

Adjusted Earnings were an expense of $796 million, reflecting lower net interest expense, largely offset by adverse currency exchange rate effects and reduced tax credits, compared with the second quarter 2019. Half year segment earnings were an expense of $1,258 million. This included a gain of $530 million from the impact of the weakening Brazilian real on financing positions, which is part of identified items.

Adjusted Earnings were an expense of $1,784 million, reflecting adverse currency exchange rate effects, compared with the first half 2019.

OUTLOOK FOR THE THIRD QUARTER 2020
As a result of COVID-19, there continues to be significant uncertainty in the macroeconomic conditions with an expected negative impact on demand for oil, gas and related products. Furthermore, recent global developments and uncertainty in oil supply have caused further volatility in commodity markets. The third quarter 2020 outlook provides ranges for operational and financial metrics based on current expectations, but these are subject to change in the light of current evolving market conditions. Due to demand or regulatory requirements and/or constraints in infrastructure, Shell may need to take measures to curtail or reduce oil and/or gas production, LNG liquefaction as well as utilisation of refining and chemicals plants and similarly sales volumes could be impacted. Such measures will likely have a variety of impacts on our operational and financial metrics.

Integrated Gas production is expected to be approximately 820 - 880 thousand boe/d. LNG liquefaction volumes are expected to be approximately 7.6 - 8.2 million tonnes. Due to price-lag in oil-linked LNG term contracts, the impact of low oil prices is expected to become more significant in the third quarter.

Upstream production is expected to be approximately 2,100 - 2,400 thousand boe/d.
Refinery utilisation is expected to be approximately 68% - 76%.
Oil Products sales volumes are expected to be approximately 4,000 - 5,000 thousand b/d.
Chemicals manufacturing plant utilisation is expected to be approximately 78% - 88%.
Chemicals sales volumes are expected to be approximately 3,600 - 3,900 thousand tonnes.

Corporate Adjusted Earnings are expected to be a net expense of approximately $800 - 875 million in the third quarter 2020 and a net expense of approximately $3,200 - 3,500 million for the full year 2020. This excludes the impact of currency exchange rate effects.

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