IFRS16 update call Royal Dutch Shell plc March 28, 2019 - - PowerPoint PPT Presentation

Royal Dutch Shell March 28, 2019

Royal Dutch Shell plc March 28, 2019

IFRS16 update call

#makethefuture

Royal Dutch Shell March 28, 2019 2

Introduction

Martin ten Brink EVP Controller Tjerk Huysinga EVP Investor Relations

Royal Dutch Shell March 28, 2019

Royal Dutch Shell March 28, 2019 3

Definitions & cautionary note

All figure quoted in this presentation are unaudited and provisional. Unless specified otherwise, all figures quoted on a full-year basis. For 2019, we will provide estimates for key indicators on a pre-IFRS16 basis for comparability with actuals. Gearing is defined as net debt as a percentage of total capital. The net debt calculation includes the fair value of derivative financial instruments used to hedge foreign exchange and interest rate risks relating to debt, and associated collateral balances. Free Cash Flow is defined as the sum of “Cash flow from operating activities” and “Cash flow from investing activities”. Cash flow from operating activities excluding working capital movements is defined as “Cash flow from operating activities” less the sum of the following items in the Consolidated Statement of Cash Flows: (i) (increase)/decrease in inventories, (ii) (increase)/decrease in current receivables, and (iii) increase/(decrease) in current payables. Operating expenses is defined as the sum of Production and manufacturing expenses, Selling, distribution and administrative expenses, and Research and development. In this presentation ROACE (Return on Average Capital Employed) is presented on a CCS basis excluding identified items and referred to as “Clean CCS ROACE” ; it is defined as the sum of current cost of supplies (CCS) earnings attributable to shareholders excluding identified items for the current and previous three quarters, as a percentage of the average capital employed for the same period. Capital employed consists of total equity, current debt and noncurrent debt. Capital investment comprises capital expenditure, exploration expense excluding well write-offs, investments in joint ventures and associates, new leases and investments in Integrated Gas, Upstream and Downstream equity securities, all of which on an accruals basis. This presentation contains the following forward-looking Non-GAAP measures: Free Cash Flow, Clean CCS ROACE, Capital Investment, gearing, Operating Expenses and ROACE. We are unable to provide a reconciliation of the above forward- looking Non-GAAP measures to the most comparable GAAP financial measures because certain information needed to reconcile the above Non-GAAP measure to the most comparable GAAP financial measure is dependent on future events some which are outside the control of the company, such as oil and gas prices, interest rates and exchange rates. Moreover, estimating such GAAP measures with the required precision necessary to provide a meaningful reconciliation is extremely difficult and could not be accomplished without unreasonable effort. Non-GAAP measures in respect of future periods which cannot be reconciled to the most comparable GAAP financial measure are calculated in a manner which is consistent with the accounting policies applied in Royal Dutch Shell plc’s financial statements. The companies in which Royal Dutch Shell plc directly and indirectly owns investments are separate legal entities. In this presentation “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 Royal Dutch Shell plc and its subsidiaries in general or to those who work for them. These terms are also used where no useful purpose is served by identifying the particular entity or entities. ‘‘Subsidiaries’’, “Shell subsidiaries” and “Shell companies” as used in this presentation refer to entities over which Royal Dutch Shell plc either directly or indirectly has control. Entities and unincorporated arrangements over which Shell has joint control are generally referred to as “joint ventures” and “joint operations”, respectively. Entities over which Shell has significant influence but neither control nor joint control are referred to as “associates”. The term “Shell interest” is used for convenience to indicate the direct and/or indirect ownership interest held by Shell in an entity or unincorporated joint arrangement, after exclusion of all third-party interest. This presentation contains forward-looking statements (within the meaning of the U.S. Private Securities Litigation Reform Act of 1995) 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

• n 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 “aim”, “ambition’, ‘‘anticipate’’, ‘‘believe’’, ‘‘could’’, ‘‘estimate’’, ‘‘expect’’, ‘‘goals’’, ‘‘intend’’, ‘‘may’’, ‘‘objectives’’, ‘‘outlook’’, ‘‘plan’’, ‘‘probably’’, ‘‘project’’, ‘‘risks’’, “schedule”, ‘‘seek’’, ‘‘should’’, ‘‘target’’, ‘‘will’’ 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 presentation, 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) reserves 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 regulatory measures addressing climate change; (k) economic and financial market conditions in various countries and regions; (l) political risks, including the risks of expropriation and renegotiation of the terms

• f 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. No assurance is provided that

future dividend payments will match or exceed previous dividend payments. All forward-looking statements contained in this presentation 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 risk factors that may affect future results are contained in Royal Dutch Shell’s Form 20-F for the year ended December 31, 2018 (available at www.shell.com/investor and www.sec.gov). These risk factors also expressly qualify all forward-looking statements contained in this presentation and should be considered by the reader. Each forward-looking statement speaks only as of the date of this presentation, March 28, 2019. Neither Royal Dutch Shell plc 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 presentation. We may have used certain terms, such as resources, in this presentation that the United States Securities and Exchange Commission (SEC) strictly prohibits us from including in our 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 www.sec.gov.

Royal Dutch Shell March 28, 2019 4

Key messages

◼ IFRS16 has a material impact on Shell’s financial statements and

financial metrics

◼ Accounting change only, no cash impact (net) ◼ IFRS16 does not change Shell’s strategy and financial framework ◼ Additional lease liability of $16 billion recognised on balance

sheet on January 1, 2019

◼ Lease costs shift from operating expenses and purchases to

depreciation and interest expenses

Thrive in the energy transition World-class investment case Strong license to operate

Royal Dutch Shell March 28, 2019

◼ Effective January 1, 2019 ◼ Modified retrospective method ◼ Practical expedients applied:

◼ Short-term leases ◼ Onerous lease provisions

◼ Practical expedients not applied:

◼ Low-value exemption ◼ Combining lease and non-lease components

5

IFRS16

Outline of changes

Implementation of IFRIC decision on lease consolidation pending.

◼ No distinction between operating and finance

leases

◼ Operating leases on balance sheet

Implementat ation ion approach Key changes

◼ 10,0

,000+ contracts

◼ 1.2

.2 mil illio ion datapoin ints

◼ Leveragin

ing Shell Fin inance Operatio ions

Royal Dutch Shell March 28, 2019

IFRS16

Operating lease portfolio

Operatin ing lease commit itments (Decembe ber 31, , 2018)

$ billion, undiscounted

Most frequently leased assets Total undis iscounted

• peratin

ing g lease commit itments

• f $2

$24. 4.2 2 bil illio ion Vessels $8.3 billion Rigs $5.3 billion

6

Land and buil ildin ings gs & Other $5.9 billion Other assets: Retail il sit ites $2.8 billion Storage and pip ipelin ines $1.8 billion

Vessels Rigs Retail sites Storage and pipelines Land and buildings & Other

Royal Dutch Shell March 28, 2019 7

IFRS16

Incremental borrowing rate

1 Undiscounted, at December 31, 2018. 2 On or before December 31, 2019. 3 At January 1, 2019.

◼ 3 asset categories:

◼ Vessels ◼ Rigs ◼ Other

◼ 2 lease tenures:

◼ Less than 10 years ◼ 10 years and longer

◼ Credit rating per contracting entity

Incremental borrowin ing rates

$ billion

From undis iscounted commit itments to lease lia iabil ilit ity Weig ighted d average in incremental borrowin ing rate

• f 7.

7.2% 2% on transit itio ion

At J January 1, 1, 2019 2019 Average in incremental bor

• rrow
• win

ing rate (%) Operatin ing l lease lia iabil ilit ity ($ billion) Integrated Gas 8.2 4.0 Upstream 9.5 4.5 Downstream 5.5 6.6 Corporate 4.6 0.9 Tot

• tal RDS

7.2 7.2 16.0 16.0

1 2 3

Royal Dutch Shell March 28, 2019 8

IFRS16

Impact on financial metrics

Outlook for 2019 Key metric ics change, , no busin iness or value im impact

Gearin ing Operatin ing expenses Segment earnin ings Free cash flow

~4% ~4%-5% 5% in increase

◼ Operating lease liabilities on balance sheet ◼ Higher net debt, gearing increases

~$2 ~$2-3 bil illio ion decrease

◼ Operating lease costs reported as depreciation and

interest ~$1 bil illio ion im impact

◼ Lease interest expenses treated as financing expenses,

reported in Corporate segment

◼ Earnings shift between segments: Corporate earnings

decrease, business segments earnings increase ~$4 bil illio ion in increase

◼ Lease payments reported under CFFF ◼ No longer under CFFO and CFFI, i.e. FCF

Royal Dutch Shell March 28, 2019

Clean CCS ROACE

~0.5 .5% decrease ~$1 ~$1-2 bil illio ion in increase

Capit ital in investment

9

IFRS16

Impact on financial metrics

Outlook for 2019

◼ Capital investment will increase by including all leases,

no longer only finance leases

◼ A supplementary metric “Cash capital expenditure” will

be added starting Q1’19, comprising capital expenditure, investments in joint ventures and associates and investments in securities (as presented in the statement of cash flows)

◼ Decrease driven by increase in capital employed ◼ Clean CCS ROACE metric definition will be revised

starting Q1’19 to add back after-tax interest expense Metric ic defin init ition updates in increase transparency and comparabil ility wit ith peers

Royal Dutch Shell March 28, 2019 10

IFRS16

Impact on financial statements

1 Reflects the impact of prepayments (netted of PP&E). 2 Reflects the impact of onerous lease provisions (netted of PP&E).

Balance sheet

◼

Additional assets and liabilities

◼

Negligible impact on equity Income s statement

◼

Operating lease expenses now reported as depreciation and interest

◼

Expense front-loaded in earlier years of lease tenure (timing effect)

◼

Impact on net income expected to be negligible Cash f flow s statement

◼

Operating lease payments reported as CFFF , instead of CFFO and CFFI

◼

CFFI decreases as leases are no longer capitalised

◼

No impact on net cash

Addit itio ional $16 bil illio ion of lease lia iabil ilit ities recognis ised

BALANCE SHE HEET (at January 1, 2019) 1, 2019) Assets 14.8 14.8 14.8 14.8 PP&E (Right-of-use assets) 15.6 15.6 Trade and other receivables1 (0.8) (0.8) Lia iabil ilit itie ies 14.8 14.8 14.8 14.8 Lease liabilities 16.0 16.0 Trade and other payables2 (0.5) (0.5) Decommissioning and other provisions2 (0.7) (0.7) Tot

• tal equit

ity ~0 ~0 ~0 ~0 Off balance sheet com

• mmit

itments (at December 31, 2018) 24.2 24.2 STATEMENT OF INCOME (ou

• utloo
• ok for
• r 2019)

2019) Purchases ~1 ~(1) Operating expenses ~2-3 ~(2)-(3) Depreciation ~2-3 ~2-3 Interest expense ~1 ~1 Net in incom

• me

~3 ~3-4 ~3 ~3-4 ~0 ~0 STATEMENT OF CASH F H FLOWS (ou

• utloo
• ok for
• r 2019)

2019) CFFO ~(3)-(4) ~3-4 CFFI ~(0)-(1) ~0-1 CFFF (3)-(5) (3)-(5) Cash a and cash equiv ivalents ~( ~(3) 3)-(5) 5) ~( ~(3) 3)-(5) 5) $ b $ bil illion ion IAS 17 17 IFRS16 16 Net im impact

Royal Dutch Shell March 28, 2019 11

IFRS16

Going forward

◼ Durin

ing 20 2019 19 Key financial indicators will also be provided on a pre-IFRS16 basis to support transition

◼ May 2,

2, 20 2019 19 First quarter 2019 results announcement, including IFRS16 transition disclosures

◼ June 4

4 & 5 5, 2 , 201 019 9 Management Day, outlook consistent with IFRS16

Royal Dutch Shell March 28, 2019 12

Key messages

◼ IFRS16 has a material impact on Shell’s financial statements and

financial metrics

◼ Accounting change only, no cash impact (net) ◼ IFRS16 does not change Shell’s strategy and financial framework ◼ Additional lease liability of $16 billion recognised on balance

sheet on January 1, 2019

◼ Lease costs shift from operating expenses and purchases to

depreciation and interest expenses

Thrive in the energy transition World-class investment case Strong license to operate

Royal Dutch Shell March 28, 2019 13

Questions & Answers

Martin ten Brink EVP Controller Tjerk Huysinga EVP Investor Relations

Royal Dutch Shell March 28, 2019

Royal Dutch Shell March 28, 2019