Royal Dutch Shell plc 3rd Quarter 2010 Results
LONDON, October 28, 2010 /PRNewswire-FirstCall/ --
- Royal Dutch Shell's third quarter 2010 earnings, on a
current cost of supplies (CCS) basis, were $3.5 billion compared to
$3.0 billion a year ago. Basic CCS earnings per share increased by
16% versus the same quarter a year ago.
- Third quarter 2010 CCS earnings, excluding identified items
(see page 5), were $4.9 billion compared to $2.6 billion in the third
quarter 2009.
- Cash flow from operating activities for the third quarter
2010 was $9.0 billion.
- Net capital investment for the quarter was $10.3 billion,
including the business acquisition of East Resources, Inc. in the USA
and the joint acquisition of Arrow Energy Limited in Australia. Total
dividends paid to shareholders during the third quarter 2010 were
$2.6 billion.
- Gearing at the end of the third quarter 2010 was 19.0%.
- A third quarter 2010 dividend has been announced of $0.42
per ordinary share. With the introduction of the Scrip Dividend
Programme, effective from the third quarter 2010 interim dividend,
eligible shareholders have a choice to receive dividends in cash or
in new shares.
Summary of unaudited results
Quarters $ million Nine months
Q3 2010 Q2 2010 Q3 2009 %(1) 2010 2009 %
3,153 3,270 1,543 Upstream 10,838 5,818
325 1,471 1,292 Downstream 2,539 2,020
Corporate and
43 (212) 155 Non-controlling interest (430) 789
3,521 4,529 2,990 +18 CCS earnings 12,947 8,627 +50
Estimated CCS adjustment for
(58) (136) 257 Downstream 390 1,930
3,463 4,393 3,247 +7 Income attributable to 13,337 10,557 +26
shareholders
Basic CCS earnings per share
0.57 0.74 0.49 +16 ($) 2.11 1.41 +50
(0.01) (0.02) 0.04 Estimated CCS adjustment per 0.07 0.31
share ($)
0.56 0.72 0.53 +6 Basic earnings per share ($) 2.18 1.72 +27
Cash flow from operating
9,016 8,096 7,350 +23 activities 21,894 15,828 +38
Cash flow from operating
1.47 1.32 1.20 +23 activities per share ($) 3.57 2.58 +38
0.42 0.42 0.42 - Dividend per share ($) 1.26 1.26 -
(1) Q3 on Q3 change
Royal Dutch Shell Chief Executive Officer Peter Voser commented:
"Our results have rebounded substantially from year-ago levels, driven by some improvement in industry conditions, and Shell's strategy. We are seeing new growth, with improved earnings and cash flow, underpinned by a 5% increase in oil and gas production, a 22% increase in LNG sales and increased downstream volumes. This is a better performance from Shell, achieved despite continued difficult industry conditions in refining and natural gas markets.
We are making good progress on implementing our strategy, with a focus on performance improvement, delivering a new wave of growth, and maturing the next generation of growth options for shareholders, with achievements in all of these themes during the quarter.
With an emphasis on continuous improvement, Shell is driving down costs and improving capital efficiency. We have achieved some $2 billion of asset sales so far in 2010, and announced the disposal of late-life oil and gas positions at Statfjord in Norway, and refining capacity at Heide in Germany during the quarter. Our cash generation from operations continues to improve. We expect some $7-8 billion of asset sales in the 2010-11 timeframe, including exits from non-core refining and marketing positions in Europe and Africa, and rationalisation of our tight gas portfolio in North America, following recent acquisitions there."
Turning to growth delivery, Voser commented: "We are in a delivery window for new growth. Our new oil sands mine - Jackpine - started production during the quarter, part of the 100,000 boe/d Athabasca Oil Sands Project Expansion 1. AOSP-1 is the 5th start-up in a sequence of 13 new projects for 2010-11, which will drive us to achieve our cash flow and production targets for 2012.
Shell has continued to make progress with longer term growth options during the quarter, with the final investment decision on two new deep water projects - the 100,000 boe/d Mars B development in the Gulf of Mexico, and Phase 2 of the BC-10 development in Brazil. We have signed a purchase agreement with East Resources, Inc., acquiring tight gas acreage in the USA, bringing our total North America gas potential resources to some 40 tcfe, completed the joint acquisition of Arrow Energy Limited, an Australian CBM-LNG play, and progressed our Brazil retail and biofuels joint venture with Cosan."
Voser concluded: "We are making good progress against our targets, and there is more to come from Shell."
Third Quarter 2010 portfolio developments
Upstream
In Australia, Shell and PetroChina announced the successful completion of their joint acquisition of the Australian coal seam gas company, Arrow Energy Limited.
In Canada, Shell announced the successful start of production of the 100 thousand barrels of oil equivalent per day (boe/d) expansion of its oil sands operations in Canada (Shell share 60%). Production from the new Jackpine Mine combined with existing production from the Muskeg River Mine will feed the Scotford Upgrader, which processes the oil sands bitumen - heavy oil - for refined oil products. Construction for the expansion of the Scotford Upgrader is underway, and will come on-stream in early 2011 which will allow AOSP's synthetic crude production to rise to the new 255 thousand boe/d (Shell share 60%) production capacity.
In Norway, Shell agreed to sell its interests in the Statfjord field and associated satellite fields in the Norwegian sector of the North Sea, with a Shell share production of some 13 thousand barrels of oil equivalent per day (boe/d), for some $0.2 billion.
Shell completed a strategic trade to acquire additional interests in Gabon and in the UK North Sea, in return for its interest in a pair of Norwegian offshore fields.
In Saudi Arabia, Shell has entered into the second contract period for the South Rub Al Khali Company Limited (SRAK) joint venture (Shell share 50%). SRAK will now move forward with the appraisal of the Kidan sour gas fields.
In the USA, Shell signed a purchase agreement with East Resources, Inc., a private company, with a primary focus on tight gas acreage in the Marcellus shale, in the northeast USA. A multi-well appraisal programme is now on the way, with encouraging initial results.
Also in the USA, Shell announced the final investment decision for the Mars B project (Shell share 71.5%), a 100 thousand boe/d tension leg platform in the Gulf of Mexico. In Brazil, Shell also announced the final investment decision on the BC-10 Phase 2 project (Shell share 50%).
Downstream
In Germany, Shell announced a binding agreement for the sale of Shell's (100%-owned) Heide refinery (90 thousand barrels per day capacity) and associated local infrastructure and businesses. The transaction is subject to regulatory approval.
In Brazil, Shell signed a binding agreement to form a joint venture (Shell share 50%) with Cosan for the production of ethanol, sugar and power, and the supply, distribution and retail of transportation fuels. The transaction is subject to regulatory approvals.
Key features of the Third quarter 2010
- Third quarter 2010 CCS earnings were $3,521 million, 18%
higher than in the same quarter a year ago.
- Third quarter 2010 CCS earnings, excluding identified items
(see page 5), were $4,933 million compared to $2,619 million in the
third quarter 2009.
- Third quarter 2010 reported earnings were $3,463 million
compared to $3,247 million in the same quarter a year ago.
- Basic CCS earnings per share increased by 16% versus the
same quarter a year ago.
- Cash flow from operating activities for the third quarter
2010 was $9.0 billion, compared to $7.3 billion in the same quarter
last year. Excluding net working capital movements, cash flow from
operating activities in the third quarter 2010 was $8.1 billion,
compared to $7.7 billion in the same quarter last year.
- Total dividends paid to shareholders during the third
quarter 2010 were $2.6 billion.
- Capital investment for the third quarter 2010 was $11.0
billion. Net capital investment (capital investment, less divestment
proceeds) for the third quarter 2010 was $10.3 billion, including
$5.5 billion related mainly to the business acquisition of East
Resources, Inc. in the USA and the joint acquisition of Arrow Energy
Limited in Australia.
- Return on average capital employed (ROACE), on a reported
income basis, was 8.8%.
- Gearing was 19.0% at the end of the third quarter 2010
versus 13.7% at the end of the third quarter 2009.
Upstream
- Oil and gas production for the third quarter 2010 was 3,058
thousand boe/d, 5% higher than in the third quarter 2009.
Production for the third quarter 2010 excluding the impact of divestments, production sharing contracts (PSC) pricing effects and OPEC quota restrictions was 7% higher compared to the same period last year.
Underlying production in the third quarter increased by some 180 thousand boe/d from new field start-ups and the continuing ramp-up of fields, more than offsetting the impact of field declines.
- LNG sales volumes of 4.26 million tonnes in the third
quarter 2010 were 22% higher than in the same quarter a year ago.
Downstream
- Oil Products sales volumes were 4% higher than in the third
quarter 2009. Chemical product sales volumes in the third quarter
2010 increased by 13% compared to the third quarter 2009.
- Oil Products refinery availability was 93% compared to 94%
in the third quarter 2009. Chemicals manufacturing plant availability
increased to 96% from 95% in the third quarter 2009.
- Supplementary financial and operational disclosure for the
third quarter 2010 is available at www.shell.com/investor.
Summary of identified items
Earnings in the third quarter 2010 reflected the following items, which in aggregate amounted to a net charge of $1,412 million (compared to a net gain of $371 million in the third quarter 2009), as summarised in the table below:
- Upstream earnings included a net charge of $284 million,
reflecting asset impairments and write-offs of $1,442 million, a
charge related to the estimated fair value accounting of commodity
derivatives (see Note 4), tax charges and provisions, which were
partly offset by gains related to portfolio transactions and
mark-to-market valuation of certain gas contracts. Earnings for the
third quarter 2009 included a net charge of $123 million.
- Downstream earnings included charges of $1,128 million
reflecting asset impairments of $873 million, a charge related to the
estimated fair value accounting of commodity derivatives (see Note 4)
and provisions. Earnings for the third quarter 2009 included a net
gain of $536 million.
- Corporate earnings and Non-controlling interest for the
third quarter 2009 included charges of $42 million.
Summary of Identified Items
Quarters $ million Nine months
Q3 2010 Q2 2010 Q3 2009 2010 2009
Segment earnings impact of
identified items:
(284) 10 (123) Upstream (164) 92
(1,128) 311 536 Downstream (852) (347)
- - (42) Corporate and Non-controlling - 103
interest
(1,412) 321 371 CCS earnings impact (1,016) (152)
These identified items generally relate to events with an impact of more than $50 million on Royal Dutch Shell's earnings and are shown to provide additional insight into its segment earnings, CCS earnings and income attributable to shareholders. Further additional comments on the business segments are provided in the section 'Earnings by Business Segment' on page 6 and onwards.
Earnings by Business segment
Upstream
Quarters $ million Nine months
Q3 2010 Q2 2010 Q3 2009 %(1) 2010 2009 %
3,153 3,270 1,543 +104 Upstream earnings 10,838 5,818 +86
6,139 5,411 4,168 +47 Upstream cash flow from 19,276 13,952 +38
operations
9,554 5,664 5,404 +77 Net capital investment 20,700 16,379 +26
1,709 1,655 1,652 +3 Crude oil production 1,699 1,672 +2
(thousand b/d)
7,823 8,440 7,343 +7 Natural gas production 9,008 8,181 +10
available for sale (million
scf/d)
3,058 3,110 2,917 +5 Barrels of oil equivalent 3,252 3,082 +6
(thousand boe/d)
4.26 3.88 3.49 +22 LNG sales volumes (million 12.36 9.44 +31
tonnes)
(1) Q3 on Q3 change
Third quarter Upstream earnings were $3,153 million compared to $1,543 million a year ago. Earnings included a net charge of $284 million related to identified items, compared to a net charge of $123 million in the third quarter 2009 (see page 5).
Upstream earnings, excluding the impact of identified items, compared to the third quarter 2009 reflected the effect on revenues from improved crude oil and natural gas realised prices and increased production volumes, lower operating costs and lower exploration well write-off expenses which were partially offset by increased production taxes. Earnings also reflected increased LNG sales volumes, improved LNG realised prices and higher dividends received from an LNG joint venture.
Global liquids realisations were 15% higher than in the third quarter 2009. Global gas realisations were 17% higher than in the same quarter a year ago. In the Americas, gas realisations increased by 25%. Outside the Americas, gas realisations increased by 16%.
Third quarter 2010 production was 3,058 thousand boe/d compared to 2,917 thousand boe/d a year ago. Crude oil production was up 3% and natural gas production was up 7% compared to the third quarter 2009. In Nigeria, Shell's share of Shell Petroleum Development Nigeria Company (SPDC) joint venture production increased by 175 thousand boe/d driven by the ramp-up of new projects and improved security conditions.
Underlying production, compared to the third quarter 2009, increased by some 180 thousand boe/d from new field start-ups and the continuing ramp-up of fields over the past 12 months, more than offsetting field declines.
LNG sales volumes of 4.26 million tonnes were 22% higher than in the same quarter a year ago. Volumes improved globally, with major contributions from the Sakhalin II LNG project and Nigeria LNG.
Downstream
Quarters $ million Nine months
Q3 2010 Q2 2010 Q3 2009 %(1) 2010 2009 %
325 1,471 1,292 -75 Downstream CCS earnings 2,539 2,020 +26
(61) (142) 251 Estimated CCS adjustment 381 1,986
264 1,329 1,543 -83 Downstream earnings 2,920 4,006 -27
1,953 3,197 3,157 -38 Downstream cash flow from 2,309 1,813 +27
operations
701 (21) 1,677 -58 Net capital investment 1,367 5,024 -73
3,292 3,296 2,997 +10 Refinery plant intake 3,196 3,095 +3
(thousand b/d)
6,385 6,615 6,121 +4 Oil Products sales volumes 6,389 6,109 +5
(thousand b/d)
5,333 5,254 4,723 +13 Chemicals sales volumes 15,356 13,476 +14
(thousand tonnes)
(1) Q3 on Q3 change
Third quarter Downstream CCS earnings were $325 million compared to $1,292 million in the third quarter 2009. Earnings included charges of $1,128 million related to identified items, compared to a net gain of $536 million in the third quarter 2009 (see page 5).
Downstream CCS earnings, excluding the impact of identified items, compared to the third quarter 2009 reflected improved refining contributions, higher Chemicals earnings and lower operating costs.
Oil Products marketing CCS earnings, excluding the impact of identified items, improved compared to the same period a year ago, mainly reflecting higher lubricants earnings and reduced trading contributions.
Oil Products sales volumes increased by 4% compared to the same quarter last year. Excluding the impact of divestments, sales volumes increased by 6%.
Refining CCS results, excluding impairment charges, improved from the third quarter 2009, benefiting from higher realised refining margins globally and higher refinery plant intake volumes. Refinery availability was 93% compared to 94% in the third quarter 2009.
Chemicals CCS earnings compared to the third quarter 2009 reflected improved realised chemicals margins, higher chemicals sales volumes and lower operating costs.
Chemicals sales volumes increased by 13% compared to the same quarter last year, mainly due to start-up of the Shell Eastern Petrochemicals Complex in Singapore. Chemicals manufacturing plant availability increased to 96% from 95% in the third quarter 2009.
Corporate and Non-controlling Interest
Quarters $ million Nine months
Q3 2010 Q2 2010 Q3 2009 2010 2009
148 (112) 202 Corporate (140) 883
(105) (100) (47) Non-controlling interest (290) (94)
Corporate and Non-controlling
43 (212) 155 Interest (430) 789
Third quarter Corporate earnings and Non-controlling interest were $43 million compared to $155 million for the same period last year. Earnings for the third quarter 2009 included charges of $42 million related to identified items (see page 5).
Corporate earnings for the third quarter 2010 reflected higher tax credits, which were more than offset by lower currency exchange gains and a lower net interest result compared to the same period in 2009.
FORTHCOMING EVENTS
Fourth quarter 2010 results and fourth quarter 2010 dividend are scheduled to be announced on February 3, 2011. First quarter 2011 results and first quarter 2011 dividend are scheduled to be announced on April 28, 2011. Second quarter 2011 results and second quarter 2011 dividend are scheduled to be announced on July 28, 2011. Third quarter 2011 results and third quarter 2011 dividend are scheduled to be announced on October 27, 2011. A Shell strategy update is planned for March 15, 2011.
Unaudited Condensed Consolidated Interim Financial Statements
Consolidated Statement of income
Quarters $ million Nine months
Q3 2010 Q2 2010 Q3 2009 %(1) 2010 2009 %
90,712 90,568 75,009 Revenue 267,342 197,113
1,020 1,308 746 Share of profit of 3,974 3,209
equity-accounted
investments
1,010 (16) 271 Interest and other income(3) 1,311 1,388
92,742 91,860 76,026 Total revenue and other 272,627 201,710
income
70,278 69,759 55,781 Purchases 205,038 142,196
6,052 5,925 5,885 Production and 17,164 17,919
manufacturing expenses
3,701 3,433 4,306 Selling, distribution and 11,227 11,898
administrative expenses
203 180 318 Research and development 597 794
610 403 637 Exploration 1,390 1,509
6,196 3,237 4,341 Depreciation, depletion 12,359 10,710
and amortisation
317 191 189 Interest expense 769 538
5,385 8,732 4,569 +18 Income before taxation 24,083 16,146 +49
1,820 4,245 1,281 Taxation 10,465 5,439
3,565 4,487 3,288 +8 Income for the period 13,618 10,707 +27
102 94 41 Income attributable to 281 150
non-controlling interest
3,463 4,393 3,247 +7 Income attributable to 13,337 10,557 +26
Royal Dutch Shell plc
shareholders
Estimated CCS adjustment for
58 136 (257) Downstream (390) (1,930)
3,521 4,529 2,990 +18 CCS earnings 12,947 8,627 +50
Basic earnings per share
Quarters Nine months
Q3 2010 Q2 2010 Q3 2009 2010 2009
0.56 0.72 0.53 Earnings per share ($) 2.18 1.72
0.57 0.74 0.49 CCS earnings per share ($) 2.11 1.41
Diluted earnings per share
Quarters Nine months
Q3 2010 Q2 2010 Q3 2009 2010 2009
0.56 0.72 0.53 Earnings per share ($) 2.17 1.72
0.57 0.74 0.49 CCS earnings per share ($) 2.11 1.41
Shares(2)
Quarters Millions Nine months
Q3 2010 Q2 2010 Q3 2009 2010 2009
Weighted average number of shares
as the basis for:
6,132.6 6,134.0 6,127.0 Basic earnings per share 6,131.1 6,125.1
6,138.3 6,143.7 6,131.0 Diluted earnings per share 6,137.1 6,128.2
6,132.0 6,132.5 6,125.2 Shares outstanding at the end of 6,132.0 6,125.2
the period
(1) Q3 on Q3 change.
(2) Royal Dutch Shell plc ordinary shares of EUR0.07 each.
(3) Other income includes dividend income, net gains on sale of assets
and net foreign exchange effects on financing activities.
Condensed Statement of Changes in Equity
$ million Ordinary Shares Other Retained Total Non- Total
share held res- earnings controlling equity
capital in erves interest
trust
At December 31,
2009 527 (1,711) 9,982 127,633 136,431 1,704 138,135
Income for the
period - - - 13,337 13,337 281 13,618
Other - - (271) - (271) 57 (214)
comprehensive
income
Capital - - - 294 294 16 310
contributions
from and other
changes in
non-controlling
interest
Dividends paid - - - (7,586) (7,586) (357) (7,943)
Shares held in - 368 - - 368 - 368
trust: net
sales/(purchases)
and dividends
received
Share-based - - (52) 223 171 - 171
compensation
At September 30,
2010 527 (1,343) 9,659 133,901 142,744 1,701 144,445
$ million Ordinary Shares Other Retained Total Non- Total
share held res- earnings controlling equity
capital in erves interest
trust
At December 31,
2008 527 (1,867) 3,178 125,447 127,285 1,581 128,866
Income for the - - - 10,557 10,557 150 10,707
period
Other - - 6,562 - 6,562 49 6,611
comprehensive
income
Capital - - - 3 3 33 36
contributions
from and other
changes in
non-controlling
interest
Dividends paid - - - (7,913) (7,913) (164) (8,077)
Shares held in - 201 - - 201 - 201
trust: net
sales/(purchases)
and dividends
received
Share-based - - (22) 190 168 - 168
compensation
At September 30,527 (1,666) 9,718 128,284 136,863 1,649 138,512
2009
Condensed Consolidated balance sheet
$ million
Sept 30, Jun 30, 2010 Sept 30,
2010 2009
Assets
Non-current assets:
Intangible assets 5,171 5,171 5,288
Property, plant and equipment 139,863 133,179 127,207
Equity-accounted investments 34,015 31,128 30,265
Investments in securities 3,968 3,860 4,187
Deferred tax 5,372 4,480 4,309
Pre-paid pension costs 10,383 9,316 9,691
Other 8,909 7,528 9,646
207,681 194,662 190,593
Current assets:
Inventories 28,922 27,972 25,420
Accounts receivable 62,769 62,615 66,966
Cash and cash equivalents 11,282 12,008 14,275
102,973 102,595 106,661
Total assets 310,654 297,257 297,254
Liabilities
Non-current liabilities:
Debt 35,148 35,796 31,522
Deferred tax 13,179 13,802 13,917
Retirement benefit obligations 6,048 5,873 5,918
Other provisions 14,352 13,322 13,523
Other 4,696 4,869 4,719
73,423 73,662 69,599
Current liabilities:
Debt 9,932 4,505 4,774
Accounts payable and accrued 65,980 64,553 69,489
liabilities
Taxes payable 13,431 12,096 11,879
Retirement benefit obligations 397 388 435
Other provisions 3,046 2,890 2,566
92,786 84,432 89,143
Total liabilities 166,209 158,094 158,742
Equity attributable to Royal Dutch 142,744 137,488 136,863
Shell plc shareholders
Non-controlling interest 1,701 1,675 1,649
Total equity 144,445 139,163 138,512
Total liabilities and equity 310,654 297,257 297,254
Condensed Consolidated statement of cash flows
Quarters $ million Nine months
Q3 2010 Q2 2010 Q3 2009 2010 2009
Cash flow from operating
activities:
3,565 4,487 3,288 Income for the period 13,618 10,707
Adjustment for:
3,545 4,210 1,677 - Current taxation 11,869 5,888
264 161 157 - Interest (income)/expense 656 857
- Depreciation, depletion and
6,196 3,237 4,341 amortisation 12,359 10,710
- Net (gains)/losses on sale
(681) (28) (81) of assets (932) (366)
- Decrease/(increase) in net
937 (482) (384) working capital (5,175) (3,584)
- Share of profit of
(1,020) (1,308) (746) equity-accounted investments (3,974) (3,209)
1,486 1,425 993 - Dividends received from 4,455 3,212
equity-accounted
investments
- Deferred taxation and other
(1,941) 182 (401) provisions (1,466) (987)
(86) 425 332 - Other 686 (1,458)
Cash flow from operating
12,265 12,309 9,176 activities (pre-tax) 32,096 21,770
(3,249) (4,213) (1,826) Taxation paid (10,202) (5,942)
Cash flow from operating
9,016 8,096 7,350 activities 21,894 15,828
Cash flow from investing
activities:
(9,609) (6,513) (6,219) Capital expenditure (21,369) (19,010)
Investments in
(1,179) (136) (448) equity-accounted investments (1,940) (2,302)
666 1,007 327 Proceeds from sale of assets 2,039 805
Proceeds from sale of
44 136 267 equity-accounted investments 211 487
(37) 26 (16) (Additions to)/proceeds from (18) (68)
sale of securities
51 13 118 Interest received 102 288
Cash flow from investing
(10,064) (5,467) (5,971) activities (20,975) (19,800)
Cash flow from
financing
activities:
3,232 1,017 (57) Net (decrease)/increase in 4,399 (5,691)
debt with maturity period
within three months
199 3,323 5,353 Other debt: New borrowings 7,729 19,281
(491) (414) (241) Repayments (2,852) (2,057)
(307) (379) (86) Interest paid (1,204) (610)
Change in non-controlling
(3) 330 23 interest 315 42
Dividends paid to:
- Royal Dutch Shell plc
(2,583) (2,448) (2,656) shareholders (7,586) (7,913)
(168) (150) (65) - Non-controlling interest (357) (164)
Shares held in trust:
- Net sales/(purchases) and
(34) 86 (17) dividends received 170 70
Cash flow from financing
(155) 1,365 2,254 activities 614 2,958
477 (434) 46 Currency translation 30 101
differences relating to cash
and
cash equivalents
(Decrease)/increase in cash
(726) 3,560 3,679 and cash equivalents 1,563 (913)
Cash and cash equivalents at
12,008 8,448 10,596 beginning of period 9,719 15,188
Cash and cash equivalents at
11,282 12,008 14,275 end of period 11,282 14,275
EXPLANATORY NOTES
1. Basis of preparation
The quarterly financial report and tables of Royal Dutch Shell plc and its subsidiaries (collectively known as "Shell") are prepared on the same accounting principles as, and should be read in conjunction with, the Annual Report on Form 20-F for the year ended December 31, 2009 (pages 101 to 106) as filed with the US Securities and Exchange Commission.
With effect from January 1, 2010, acquisitions and divestments are accounted for in accordance with revised IFRS 3 Business Combinations and IAS 27 Consolidated and Separate Financial Statements. The revised standards apply with prospective effect to the acquisition of a business or for certain types of transactions involving an additional investment or a partial disposal, requiring for example the recognition in income of certain transaction costs, the recognition at fair value of contingent consideration payable and the re-measurement of existing interests held or retained. The exact impact depends on the individual transaction concerned, with potentially different amounts being recognised in the Consolidated Financial Statements than would previously have been the case.
2. Earnings on an estimated current cost of supplies (CCS) basis
To facilitate a better understanding of underlying business performance, the financial results are also analysed on an estimated current cost of supplies (CCS) basis as applied for the Downstream segment earnings. Earnings on an estimated current cost of supplies basis provides useful information concerning the effect of changes in the cost of supplies on Shell's results of operations and is a measure to manage the performance of the Downstream segment but is not a measure of financial performance under IFRS.
On this basis, the purchase price of the volumes sold during the period is based on the estimated current cost of supplies during the same period after making allowance for the estimated tax effect, instead of the first-in, first-out (FIFO) method of inventory accounting. Earnings calculated on this basis do not represent an application of the last-in, first-out (LIFO) inventory basis and do not reflect any inventory drawdown effects.
3. Return on average capital employed (ROACE)
ROACE is defined as the sum of the current and previous three quarters' income adjusted for interest expense, after tax, divided by the average capital employed for the period.
4. Impacts of Accounting for Derivatives
IFRS requires derivative instruments to be recognised in the financial statements at fair value. Any change in the current period between the period-end market price and the contract settlement price is recognised in income where hedge accounting is either not permitted or not applied to these contracts.
The physical crude oil and related products held by the Downstream business as inventory are recorded at historical cost or net realisable value, whichever is lower, as required under IFRS. Consequently, any increase in value of the inventory over cost is not recognised in income until the sale of the commodity occurs in subsequent periods.
In the Downstream business, the buying and selling of commodities includes transactions conducted through the forward markets using commodity derivatives to reduce economic exposure. Some derivatives are associated with a future physical delivery of the commodities.
Differences in the accounting treatment for physical inventory (at cost or net realisable value, whichever is lower) and derivative instruments (at fair value) have resulted in timing differences in the recognition of gains or losses between reporting periods.
Similarly, earnings from long-term contracts held in the Upstream business are recognised in income upon realisation. Associated commodity derivatives are recognised at fair value as of the end of each quarter.
These differences in accounting treatment for long-term contracts (on accrual basis) and derivative instruments (at fair value) have resulted in timing differences in the recognition of gains or losses between the reporting periods.
The aforementioned timing differences for Downstream and Upstream are reported as identified items in the quarterly results and are estimates derived from the overall portfolio of derivatives.
Certain UK gas contracts held by Upstream contain embedded derivatives or written options, for which IFRS requires recognition at fair value, even though they are entered into for operational purposes. The impact of the mark-to-market calculation is also reported as an identified item in the quarterly results.
CAUTIONARY STATEMENT
All amounts shown throughout this Report are unaudited.
The companies in which Royal Dutch Shell plc (NYSE: RDS.B; NYSE: RDS.A) directly and indirectly owns investments are separate entities. In this document "Shell", "Shell group" and "Royal Dutch Shell" are sometimes used for convenience where references are made to Royal Dutch Shell plc and its subsidiaries in general. Likewise, the words "we", "us" and "our" are also used to refer to subsidiaries in general or to those who work for them. These expressions are also used where no useful purpose is served by identifying the particular company or companies. ''Subsidiaries'', "Shell subsidiaries" and "Shell companies" as used in this document refer to companies in which Royal Dutch Shell either directly or indirectly has control, by having either a majority of the voting rights or the right to exercise a controlling influence. The companies in which Shell has significant influence but not control are referred to as "associated companies" or "associates" and companies in which Shell has joint control are referred to as "jointly controlled entities". In this document, associates and jointly controlled entities are also referred to as "equity-accounted investments". The term "Shell interest" is used for convenience to indicate the direct and/or indirect (for example, through our 34% shareholding in Woodside Petroleum Ltd.) ownership interest held by Shell in a venture, partnership or company, after exclusion of all third-party interest.
This document contains forward-looking statements concerning the financial condition, results of operations and businesses of Royal Dutch Shell. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. Forward-looking statements are statements of future expectations that are based on management's current expectations and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in these statements. Forward-looking statements include, among other things, statements concerning the potential exposure of Royal Dutch Shell to market risks and statements expressing management's expectations, beliefs, estimates, forecasts, projections and assumptions. These forward-looking statements are identified by their use of terms and phrases such as "anticipate", "believe", "could", "estimate", "expect", "intend", "may", "plan", "objectives", "outlook", "probably", "project", "will", "seek", "target", "risks", "goals", "should", "scheduled" and similar terms and phrases. There are a number of factors that could affect the future operations of Royal Dutch Shell and could cause those results to differ materially from those expressed in the forward-looking statements included in this document, including (without limitation): (a) price fluctuations in crude oil and natural gas; (b) changes in demand for Shell's products; (c) currency fluctuations; (d) drilling and production results; (e) reserve estimates; (f) loss of market share and industry competition; (g) environmental and physical risks; (h) risks associated with the identification of suitable potential acquisition properties and targets, and successful negotiation and completion of such transactions; (i) the risk of doing business in developing countries and countries subject to international sanctions; (j) legislative, fiscal and regulatory developments including potential litigation and regulatory effects arising from recategorisation of reserves; (k) economic and financial market conditions in various countries and regions; (l) political risks, including the risks of expropriation and renegotiation of the terms of contracts with governmental entities, delays or advancements in the approval of projects and delays in the reimbursement for shared costs; and (m) changes in trading conditions. All forward-looking statements contained in this document are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Readers should not place undue reliance on forward-looking statements. Additional factors that may affect future results are contained in Royal Dutch Shell's Annual Report and Form 20-F for the year ended December 31, 2009 (available at http://www.shell.com/investor and http://www.sec.gov). These factors also should be considered by the reader. Each forward-looking statement speaks only as of the date of this document, October 28, 2010. Neither Royal Dutch Shell nor any of its subsidiaries undertake any obligation to publicly update or revise any forward-looking statement as a result of new information, future events or other information. In light of these risks, results could differ materially from those stated, implied or inferred from the forward-looking statements contained in this document.
The United States Securities and Exchange Commission (SEC) permits oil and gas companies, in their filings with the SEC, to disclose only proved reserves that a company has demonstrated by actual production or conclusive formation tests to be economically and legally producible under existing economic and operating conditions. We use certain terms in this document that SEC's guidelines strictly prohibit us from including in filings with the SEC. U.S. Investors are urged to consider closely the disclosure in our Form 20-F, File No 1-32575, available on the SEC website http://www.sec.gov. You can also obtain these forms from the SEC by calling 1-800-SEC-0330.
SOURCE Royal Dutch Shell plc
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