Shell Third Quarter 2020 Update Note

This is an update to the third quarter 2020 outlook provided in the second quarter results announcement on July 30, 2020. The impacts presented here may vary from the actual results and are subject to finalisation of the third quarter 2020 results.

Unless otherwise indicated, presented impacts relate to Adjusted Earnings on a post-tax basis.

Integrated Gas

• Production is expected to be between 820 and 860 thousand barrels of oil equivalent per day.
• LNG liquefaction volumes are expected to be between 7.9 and 8.3 million tonnes.
• Trading and optimisation results are expected to be below average.
• A one-off tax charge is expected to have a negative impact on Adjusted Earnings in the range of $100 to $200M, no cash impact is expected in the third quarter.
• Approximately 80% of our term sales of LNG in 2020 have been oil price linked with a price-lag of up to 6 months. Consequently, lower realised prices due to this price-lag are expected to have a significant impact on LNG margins in the third quarter.
• CFFO can be impacted by margining resulting from movements in the forward commodity curves up until the last day of the quarter. Margining inflows are expected to be in line with the second quarter 2020.

Upstream

• Production is expected to be between 2,150 and 2,250 thousand barrels of oil equivalent per day, which includes a production impact of 60 to 70 thousand barrels of oil equivalent per day from hurricanes in the US Gulf of Mexico.
• Realised liquids prices in the first two months of this quarter reflected a 15 to 20 percent discount to Brent, similar to the discount in the second quarter 2020. Realised gas prices are trending in line with Henry Hub.
• Depreciation is expected to be at a similar level as in the second quarter 2020.
• Similar to the second quarter 2020, while Adjusted Earnings are expected to show a loss, CFFO is not expected to reflect equivalent cash tax effects due to the build-up of deferred tax positions in a number of countries.

Oil Products

• Refinery utilisation is expected to be between 64% and 68%.
• Realised gross Refining margins are expected to be significantly lower compared with the second quarter 2020.
• Sales volumes are expected to be between 4,000 and 5,000 thousand barrels per day.
• Trading and optimisation results are expected to be lower than the historical average and significantly lower compared with the second quarter 2020.
• Marketing margins are expected to be significantly higher compared with the second quarter 2020.
• Compared with the second quarter 2020, Adjusted Earnings are expected to be negatively impacted by $200 to $400M due to higher volume driven activity, phasing of maintenance activities and provisions.
• A one-off deferred tax benefit is expected to have a positive impact on Adjusted Earnings of around $100M, no cash impact is expected in the third quarter.
• Working capital movements are typically impacted by movements between the quarter opening and closing price of crude along with changes in inventory volume. Inventory volumes are expected to be lower compared with the end of the second quarter 2020, impacting working capital positively.

Chemicals

• Chemicals manufacturing plant utilisation is expected to be between 79% and 83%.
• Chemicals sales volumes are expected to between 3,700 and 4,000 thousand tonnes.
• Compared with the second quarter 2020, Adjusted Earnings are expected to be negatively impacted by around $100M due to increased activity, provisions and phasing of maintenance activities.

Corporate

• Corporate segment Adjusted Earnings are expected to be a net expense at the lower end of the $800 to $875M range for the third quarter. This excludes the impact of currency exchange effects.

Other

• As per previous disclosures, CFFO price sensitivity at Shell Group level is estimated to be $6B per annum for each $10 per barrel Brent price movement.
  • Note that this price sensitivity is indicative and is most applicable to smaller price changes than those in the current environment and in relation to the full-year results. This excludes the short-term impacts from working capital movements and cost-of-sales adjustments.
• Post-tax impairment charges in the range of $1.0 to $1.5B are expected for the third quarter. Impairment charges are reported as identified items.

Consensus

The consensus collection for quarterly Adjusted Earnings and CFFO excluding working capital movements, managed by VARA research, is scheduled to be opened for submission on 8 October 2020, closed on 21 October 2020, and made public on 22 October 2020.

Recent publications

Two recent news publications are highlighted below. They do not to impact the third quarter 2020 results.

• In an interview published today, Ben van Beurden, Chief Executive Officer of Royal Dutch Shell, discusses how Shell has responded to the COVID-19 pandemic, explains the drive behind the enhanced ambition to be a net-zero emissions energy business, and outlines the direction of the ongoing restructuring of Shell’s ways of working and organisation. Specifically, the simpler, streamlined and lower-cost organisation will focus on:
  • Upstream providing strong and resilient cash generation, focused on accelerating value;
  • reducing the Refining footprint to less than 10 sites, keeping those sites that are strategically essential in key locations, with flexibility to adapt and further integrate with the growing Chemicals and Trading businesses;
  • Integrated Gas having a larger focus on unlocking new and expanding existing LNG markets and furthering customer-led energy solutions; and
  • a customer-focused organisation, providing lower and zero carbon solutions through the Integrated Power, Biofuels and Hydrogen businesses that are significant, competitive, and complement existing businesses like Marketing.

Reduced organisational complexity, along with other measures, are expected to deliver sustainable annual cost savings of between $2.0 to $2.5B by 2022. This will partially contribute to the announced underlying operating cost reduction of $3.0 to $4.0B by the first quarter 2021. Job reductions of 7,000 to 9,000 are expected (including around 1,500 people who have agreed to take voluntary redundancy this year) by the end of 2022.

The full interview is available here: https://www.shell.com/reshape

• Our Shell Scenarios team considered the implications of choices societies could make while living with COVID-19 and explored what this might mean for energy demand and the energy transition. Explore the Rethinking the 2020s publication here: https://www.shell.com/rethinkingthe2020s