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Research and Analysis Project

BUSINESS AND FINANCIAL ANALYSIS OF:

ROYAL DUTCH SHELL PLC (SHELL)

Table of contents

1. Introduction

2. Research Objectives and overall research approach

3. Information gathering

4. Analysis

5. Findings and recommendations

6. References

7. Annexes

1. INTRODUCTION

As global population is rising and economic development is occurring to many developing countries, energy

consumptions are increasing significantly. This leads to the importance of supplying suitable, reliable

energy source.

Shell estimates that by 2050, global energy demand could increase by up to 80%; as living standards will

rise and the world’s population will grow from seven to nine billion this will cause significant pressure to

the environment and to the consumption levels of traditional energy sources. Although the continuous efforts

to improve energy from renewable sources, oil is still the most important source of energy; due to its non-

renewable nature oil companies need to exploit new fields in order to restore declining oil reserves.

Oil has a quite complicated chain value cycle that is going to require differentiated and articulated activities

to manage it; these activities go from exploration, drilling, extraction, refining, transport, marketing to final

distribution. Many players operate the industry according to geographical presence, targeted markets and

presence along the value chain; the most important players manage almost all the activities of the chain and

acting as multinational players with operations through the world with branches and local entities.

Much attention has been given to this industry since oil industry has been shaped in the years by waves of

consolidation, mergers and acquisitions (e.g. Exxon and Mobil, Total and Elf, Conoco and Phillips, BP and

Amoco), development of rising giants (China Petroleum or Petrobras for instance), waves of nationalization

in some countries (the case of YPF in Argentina as the most recent event) and sudden and dramatic oil price

changes due to political risks and lack of adequate supply.

Some points will be covered by this document with the purpose to analyse the performance and the effects of

the strategies for one of the most important players of this industry, but also of the world of the most know

multinational companies: Royal Dutch Shell.

In the following pages a disclosure about strategies, financial results and perspectives of this company will

be made in the attempt to assess its profitability, liquidity solvency and evaluation of the effectiveness of the

strategies undertaken in the last years.

2. RESEARCH OBJECTIVES AND OVERALL RESEARCH APPROACH

Choice and selection of the organization

I have selected the “The business and financial analysis” and the Research and Analysis Project is in the

context of Royal Dutch Shell financial statements. The financial analysis is based on the performance of

Shell over three financial years, from 2010 to 2012 with the purpose of evaluating both strategies, business

and financial performance for the period of analysis. Strategy and business aspects will allow to appreciate

the impact of the organization and of external factors that have affected the performance of the company

(Robinson 2012).

Reasons for selection

There are number of reasons for choosing “The business and financial analysis” basing on the financial

dimensions of Royal Dutch Shell plc. These reasons entail the following:

1. Financial ratio analysis is a vast and deeply related technique to assess performance of a company. It

permits to evaluate the effects of past strategies over the financial results and helps in understanding

the company’s actions. Financial results are the outcome of strategies which are deeply linked to the

constraints and opportunities offered by the industry and by the competitive positioning that result

from the actions of the other players that operate in the same business.

2. Although financial ratios are calculated according to historical figures, they improve knowledge

about the company and highlight relationships between operations and capital structure of the

business. This is a potential help in order to assess and predict future performance and for

operational management.

3. Shell is a multinational company which has its operations in most of the countries of the world; this

increases the interest about its operations and in particular on how it is managed, how it is viable

according to liquidity and solvency and how the impact of fluctuations of the prices of oil and gas

change its results.

4. Oil and gas industry is perceived to be one of the most lucrative industry. Is this perception real or is

it related to a common perception which is influenced by the fluctuation of the oil prices ?

5. The industry has been characterized by some important acquisitions in the last years. Oil and gas was

one on the most targeted industries in the most recent years with a 15% of the transaction volumes

occurring to energy industry (Bloomberg 2012). According to Dealogic, in 2012 oil & gas was the

leasing sector with 385 USD billion, a 14% share of global M&A volume (2,7 USD Trillion); this

makes this industry very attractive and interesting to analyse.

6. Analysis of Shell could offer an opportunity to understand why this company has been able to set its

competitive positioning and to become a leading player in this industry.

7. The competitive positioning and leadership of Shell could be related to financials and value creation

for its shareholders.

8. On the other side one needs to assess if the actual financial performance could be sustainable or if

the financial situation could lead to risks of liquidity and solvency that could create problems to the

company in the ability to pursue new investments and to undertake strategies to improve its

competitive positioning.

9. Should be Shell considered a potential target for other oil and gas companies or could be considered

a potential actor driving a further consolidation of the industry ?

In the following pages we are going to try to respond to these points.

Research objectives

1. To have understanding on how companies in oil and gas industry operate and what are the main

aspects in managing such kind of companies.

2. To conduct company corporate appraisal in order to identify company strengths and opportunities; to

highlight weaknesses and threats that could affect its operations.

3. To analyse the company business and financials over the three year period in order to assess for

profitability, solvency, liquidity, capital structure and highlights relationships between the different

types of ratios.

4. Analyse the industry competitive environment according to the Porter’s five forces and highlights

these point with the strategies pursued by Shell and how this company is creating its competitive

advantage over other competing players.

3. INFORMATION GATHERING

Most of the data and information have been taken according to the disclosure published by the oil & gas

companies in the investor relation section of their corporate website and in particular data disclosed in their

annual reports and investor’s presentations. Other data and have been taken according to published articles

on leading financial journals such as Financial Times, Wall Street Journal and finally some selected data

come from reliable sources such as providers of league tables such as Dealogic, Bloomberg and specialized

entities operating in the international analyses such as Chatam House.

4. ANALYSIS AND RECOMMENDATIONS

Shell and the Oil & Gas industry

Shell operates an industry which is characterized by a large number of players that compete in order to

exploit oil reserves, developing, refining and finally selling refined products to the market. As soon as the oil

& gas cycle is vast industry with many potential niches, players choose to position themselves on some

activities of the value chain (e.g. upstream for someone, downstream for others) or to operate the full cycle.

Usually the most important players such as Shell, BP, ExxonMobil and Chevron but also rising ginats such

as Petrobras and China Petroleum operate the entire value chain.

Due to their nature of non-renewable sources, both oil and gas resources have strategic issues related to the

need of securing the supply. Acquisition of rights and exploration of potential reserves have great importance

in order to permit companies to be able to supply in the long run. Ability to undertake investments, to avoid

extra costs in exploring and developing field and finally to optimize capital allocated has an impact on the

value generated by each project and the overall return on capital invested. In order to secure reserves many

companies undertake M&A transactions and acquire minor players which holds rights on some fields. In the

attempt to improve efficiency and recover profitability other companies divest assets or reduce their presence

in some businesses, and in particular in the downstream.

The industry is also influenced by the impact, at this time limited, of new source of energy, mainly from

renewable sources such as biofuels which are potentially reducing the monopoly of oil as a mass transport

manner. This is going to alter the strategies adopted by the most important companies and at this time some

of them, such as Shell, have started to improve their refining capacity in biofuels.

Gas is also gaining importance as an energy source to be used both for electricity generation, for heating and

also for mass transit thanks to its cleaner burning and lower pollution impact; hence some strategies have

pursued by the players in this segment such as building infrastructures to transport it.

Finally oil & gas industry is deeply related to geopolitics with prices that are widely affected by decisions of

OPEC and by political crisis and turmoil in the producing countries. Due to Asian development there is a

rising concern about the ability of the supply to secure needs of the developing economies and how these

issue could affect prices in the medium long term. Porter five forces model seems quite useful to highlight

and to summarize the main factors that are affecting the competitive positioning of the different players in

this industry:

Threat of new competitors: low

Barriers of entry to the sector are quite high with issue relate to capital needed to undertake investments, to

acquire rights and to develop projects. All these barriers make the potential risk of new competitors can be

ranked as low.

Threat of substitute products or services: medium to low

At this time, common concerns about the effects of oil and gas effects on environment have risen; further

concerns about reserves for the long run of these resources have increased with the results that new substitute

products such as biofuel or electricity produce from renewable sources are starting to gain market shares.

There is high possibility that new products and services can enter into the market although at this time,

according to the rise in the demand by developing countries, there is a limited risk that these new substitute

products would reduce significantly the demand of oil.

For this reason substitute risk can be ranked as medium to low.

Bargaining power of customers (buyers): low

Oil and gas demand is a traditionally characterized by a quite inelastic demand curve since people require

these resources in order to manage their productive cycle or to solve basilar and important issues. Although

customers can select from many suppliers at this time they do not have a significant power to influence

prices. For this reason, buyers power can be ranked a s low.

Bargaining power of suppliers: high

Oil & gas companies need to secure rights to develop field by the states or by land owners which have a

strong bargaining power in the selection of the most appealing offer. For this reason Bargaining power of

suppliers is high.

Degree of competition: high

Competition among oil and gas companies is high both in the upstream and downstream business; in

upstream business companies compete in order to secure rights to explore while in downstream they compete

in order to sell refined products to final customers. Final products are quite standardized and hence price and

marketing efforts plays a crucial role in order to create awareness among customers.

Shell: company corporate profile and recent strategies

Focusing on the company of this report, some highlights are useful to put complete the general framework

and to be viable for the following financial analysis.

Royal Dutch Shell (Shell) is a public limited company registered in England and Wales and headquartered in

the Netherlands. Thanks to a long time operating history the company is one of the most important

independent, that is not state owned players in the Oil and Gas industry. The group operates all around the

world with a presence around the world which is quite balanced. Revenues come from all around the world

with Europe and Asia leading the sales.

Business operated by Shell covers all the different phases of the industry cycle: both upstream (e.g.

acquisition of the rights, exploration, development and production) and downstream activities (e.g. refining

the crude product, processing and purifying the natural gas, marketing and distribution of the refined

products). Downstream is the most important revenue source although upstream is leading according to

invested capital. Corporate is a residual division which cover some activities offered to the group and to the

other companies which are accounted as equity investments.

In the last years the company has pursued a differentiated strategy with the purpose of maintaining capacity

of supply and to improve proven reserves thanks to development of new fields/projects which should allow

to achieve a target of 3.7 million boe/d 1 production for 2014, 12% higher than the 2010 level.

Around 30 new projects are being developed in order to create an integrated group with activities based on

oil, gas and biofuels. Investments were also made to improve operations in deep water explorations and LNG 2 project which should assist company strategy with outcomes in the medium long term. Some critical points

concerning investments occurred to Alaska drilling program which has been paused during 2013.

1 Boe/d: barrel oil equivalent per day

2 Liquified natural gas

Country Revenues Segmentation

USD mln 2010 2011 2012 2010 2011 2012

Europe 137,359 187,498 184,223 37.3% 39.9% 39.4%

Asia, Oceania, Africa 110,955 148,260 156,310 30.1% 31.5% 33.5%

USA 77,660 91,946 91,571 21.1% 19.6% 19.6%

Other Americas 42,082 42,467 35,049 11.4% 9.0% 7.5%

Revenues 368,056 470,171 467,153 100% 100% 100%

Source: company 20 F

Revenues segmentation

USD mln 2010 2011 2012 2010 2011 2012

Ustream 68,198 91,691 94,550 16.9% 17.6% 18.2%

Downstream 336,216 428,646 424,410 83.1% 82.4% 81.8%

Corporate 57 47 84 0.0% 0.0% 0.0%

Revenues 404,471 520,384 519,044 100% 100% 100%


Net Capital Investment

USD mln 2010 2011 2012 2010 2011 2012

Upstream 21,222 19,083 25,320 89.6% 81.2% 85.0%

Downstream 2,358 4,342 4,275 10.0% 18.5% 14.3%

Corporate 100 78 208 0.4% 0.3% 0.7%

Total 23,680 23,503 29,803 100% 100% 100%


Although Alaska is one of the most promising lands for oil & gas development, as the deep water project

explorations, Shell faced significant difficulties in exploring and drilling this area due to several

environmental issues arising; these problems caused the decision to stop the projects in order to have better

guarantees and avoid public shame which now has increase its interest as response of Gulf of Mexico

disaster and other environmental problems that occurred to Oil & Gas projects.

Shell operate also strategies to increase operating cash flow and improve efficiency; the group started to

restructure some activities within the Downstream business with transactions and assets sales to reduce

refining capacity and cost reduction policies.

Focusing on external strategies Shell operated acquisitions in order to improve its positioning in the LNG

business. The most recent acquisition occurred to LNG assets acquired by Repsol and located in South

America.

Financial Analysis

Accounting analysis

Shell financial analysis has been conducted according to the public disclosed financial reports issued by the

company according to the Annual Reports, 20-F and interim period repors issued by the company. Annual

financial figures for Shell are related to accounting values reported at December the 31st 2012, 2011 and

2010. Shell financial data have been used to calculate profitability ratios, solvency, liquidity and efficiency

ratios and to be compared with the same ratios taken form a panel of the most comparable and main

important competitors (Chevron, ExxonMobil and British Petroleum).

Shell files reports following IFRS (international financial reporting standards); independent registered public

accounting firm is PriceWaterhouseCoopers that issued its positive judegement on company accounts.

During the period 2009 – 2012 Shell did not make any change in accounting principles and no significant

and material changes in the business occurred.

Some particularities in the accounting statements are relate to some accounting criteria which are peculiar for

companies operating in the Oil & gas :

- Oil and natural gas exploration costs are accounted for under the successful efforts method:

exploration costs are recognized in income when incurred, except that exploratory costs that have

found proven reserves which are accounted in property plant and equipment.

- Shell has many agreements under which the company share control with another party. Whenever

these joint venture are not controlled and hence consolidated they are accounted for using the equity

method. According to disclosure in the notes the Assets of the Associates cover the liabilities; hence

no significant potential risks are disclosed in these notes.

- Inventories are valued according to FIFO for oil and chemicals and by the weighted average cost

method for materials. According to reports 2009 – 2012 oil and chemicals represented about 95% of

the total inventories

- Goodwill is tested for annual impairment according to a discounted cash flow valuation. Long term

growth rate of cash flow is equal to inflation rate for USA (2%) while discount tax rate used was 6%.

The rates are fair and hence potential manipulations could occur only to cash flow values

- Most of the investments in securities are held in non-marketable securities which are valued

according to valuation based on expected cash flow. The notes do not provide suitable indications

about the fairness of these values

- The company has a limited exposure to overdue trade receivables, which account for around the 7%

of balance sheet amount; most of them (69%) are overdue by 30 days

- The company holds significant amount in cash and cash equivalents

- Company recognizes provisions related to decommissioning, restoration, environmental and

litigation risks. decommissioning and restoration provisions account the higher share (around 80%

taking into account for both long and short term provisions). Most of the decommissioning and

restoration provisions have a cash flow impact over the 5 years. No significant risks are stated in the

notes.

Ratio analysis

Financial analysis will cover the following themes in order to assess Shell’s ability to manage:

- Profitability

- Liquidity

- Efficiency/operational performance

- Risk expectations / gearing

- Profitability

- Dividend policy

Results from comparable companies will be presented to conduct a benchmark analysis. All the companies

are quite well comparable according to business since all of them manage the entire value chain of the oil &

gas business. Some of these companies reports financial data according to US Gaap (ExxonMobil and

Chevron) while British Petroleum reports are base according to IFRS accounting standard, adopted for the

first time since 2013 with financial figures for the previous years that have been restated in order to meet

IFRS requirements. No material differences arise however for the sample and reclassification criteria have

been similar: hence ratios for all the companies in the panel are comparable.

All the companies close financial year at December the 31th and all of them operates globally although Shell

maintains a stronger presence in Europe and Exxon has a deep presence in Asia. Chevron and BP register

significant revenues in the U.S..

All the comparable companies operated important capital expenditure and although at a lesser extent some

external strategies. During the 2010 – 2012 Chevron acquired Atlas, BP acquired a company operating fields

in India while both Shell and Exxon did not operated significant acquisitions focusing mainly on developing

upstream pipeline and restoring conditions in downstream business.

Initial comparison is taken according to absolute values for all the companies of the panel according to USD

figures. Revenues have been adjusted in order to exclude excise taxes since in many countries oil and related

products are subject to excises.

Liquidity

Liquidity analysis provides an insight about the company’s ability to face short term liabilities thanks to cash

provided by the company’s short term assets. All the companies of the sample operates with negative

working capital, that it means the ability to pays suppliers with longer terms than those according which they

collect revenues. This mismatch has a positive effect on cash flow although it tends to reduce liquidity ratios

due to the higher value of the current liabilities.

In general all the companies seems quite liquid thanks to very short cash cycle length. Payable days are

almost comparable for Exxon, BP and Chevron while Shell has longer payable terms versus its suppliers

Revenues share segmentation (2012)

Shell Exxon BP Chevron

2012 2012 2012 2012

Europe 39.4% 17.5%

Asia, Oceania, Africa 33.5% 60.3%

USA 19.6% 15.4% 33.5% 40.3%

Other Americas 7.5% 6.8%

Total 100% 100% 100% 100%

66.4% 59.7%

2012 main financial results: comparison


Usd mln 2012 2012 2012 2012

Revenues 467,153 420,714 375,765 218,214

Ebitda 52,114 65,769 26,075 48,426

Net Income 26,592 44,880 11,017 26,179

Net Working Capital -10,849 -96,017 -46,587 -41,595

Fixed Assets 172,293 226,949 125,331 141,348

Intangible Assets 4,470 7,668 36,822 4,640

Net Financial Position 19,204 1,658 28,599 -9,721

Equity 188,494 165,863 118,546 136,524

Minorities 1,433 5,797 1,206 1,308

which reflect lower ability to collect cash on its receivables. Low cash cycle length could be related to some

factors which can apply to all the companies of the sample and in particular:

- High bargaining power versus suppliers which permit longer payable terms (in particular for

Shell)

- Favorable cash collection of products thanks to brand awareness and great distribution

network

- Limited inventory obsolescence and high inventory turnover ratio

Analysis of revenues breakdown between upstream and downstream do not reveal particular differences in

the business model and hence differences in cash cycle and longer receivable and payable days for Shell

cannot be related to a different business model and incidence of upstream vs downstream activities.

All the companies have important cash and cash equivalent amount and both trade receivables and

inventories are highly liquid. For this reason Shell and its competitors can turn quickly into cash their short

term assets and avoid potential risk arising from lack of liquidity. At this time hence liquidity risk is very

low.

Operational Performance

Efficiency ratios for Shell need to be calculated in order to assess the operational performance of the

company taking into account for the intense and significant development strategies pursued by the group to

improve their reserves and to increase efficiency in downstream business. Goodwill arising from acquisition

is subject to annual impairment test and this is potentially affecting efficiency ratios calculated taking into

account all LT assets (LT asset turnover ratio). In the period of analysis however goodwill was not subject

to write downs although the absolute value increased slightly due to newest acquisitions and other

investments (which are visible according to the capital expenditures/sales ratio). All the companies were able

Liquidity ratios

2010 2011 2012 2010 2011 2012 2010 2011 2012 2010 2011 2012

Current Ratio 1.20 1.24 1.26 0.94 0.95 1.01 1.31 1.29 1.45 2.14 1.96 2.06

Quick ratio 0.91 0.96 0.95 0.65 0.67 0.70 0.86 0.86 0.95 1.68 1.56 1.61

Acid ratio 0.13 0.11 0.19 0.13 0.17 0.15 0.28 0.20 0.30 0.72 0.71 0.77

Receivable dd 78 69 58 34 33 30 53 48 42 46 38 40

Inventory dd 38 29 30 24 21 20 44 33 35 17 13 16

Payable dd (cost of sales) 104 86 76 92 77 70 78 67 58 60 54 59

Cash Cycle 12 12 12 -34 -24 -19 19 15 19 3 -2 -3


Revenues share segmentation (2012)


2012 2012 2012 2012

Upstream 18.2% n.a. 7.9% 27.9%

Downstream 81.8% n.a. 91.8% 72.1%

Other & intersegment 0.0% n.a. 0.3%

Total 100% 0% 100% 100%

to improve efficiency ratios in 2011 thanks to significant increase in sales, which were achieved thanks to the

important rise in oil prices.

In general Shell efficiency ratios were in line with the values of its main competitors.

Risk ratios

Solvency/risk ratios attempt to analyze ability of the companies to meet their long-term liabilities.

Some ratios have been calculated for the sample such as:

- Financial gearing (net financial position / (net financial position + group equity) where net

financial position = financial borrowings – cash and marketable financial securities 3

- Debt / Equity (total debt, both operating and financial / equity)

- LT financial borrowing / total financial borrowing

All the companies of the sample have a mixed capital structure with the use of financial debt, operating debt

and equity. Financial debt is mainly related to acquisitions made and investments to improve upstream

capacity although gearing ratios are modest since all the companies tend to generate important cash flows

from their operations (that is cash flow before investing and financing).

3 Please note that according to analysts convention financial position is positive when financial debt exceeds cash and marketable securities

Annual growth rates - sales

2010 2011 2012 2010 2011 2012 2010 2011 2012 2010 2011 2012

Annual growth rates - sales n.a. 27.7% -0.6% n.a. 26.9% -3.0% n.a. 26.5% 0.0% n.a. 27.1% -4.6%


Oil prices

USD per barrel 2010 2011 2012 2011 2012

Brent 79.5 111.26 111.67 39.9% 0.4%

West Texas Intermediate 79.45 95.04 94.13 19.6% -1.0%

Source: Shell company 20 F

YoY growth rate

Efficiency ratio

2010 2011 2012 2010 2011 2012 2010 2011 2012 2010 2011 2012

Fixed asset turnover 2.58 3.09 2.71 1.71 2.02 1.85 2.70 3.04 3.00 1.72 1.87 1.54

LT asset turnover 1.83 2.17 1.97 1.40 1.68 1.56 1.70 1.91 1.86 1.34 1.49 1.25

Total asset turnover 1.14 1.36 1.30 1.13 1.31 1.26 1.10 1.29 1.26 0.97 1.09 0.94

Capital exenditures / Sales 6.0% 4.4% 6.1% 6.9% 4.6% 6.3% 1.5% 7.2% 3.5% 10.9% 13.1% 14.2%


Solvency ratios

2010 2011 2012 2010 2011 2012 2010 2011 2012 2010 2011 2012

Financial Gearing 17.3% 13.2% 9.2% 4.3% 2.5% 1.0% 20.8% 20.9% 19.4% -5.6% -8.9% -7.7%

Debt / Equity 1.2 1.0 0.9 1.1 1.1 1.0 1.9 1.6 1.5 0.8 0.7 0.7

LT borrowings % 77.6% 81.9% 79.3% 85.0% 56.1% 70.5% 67.7% 79.6% 79.4% 98.4% 96.7% 99.0%

Net Financial Position 30,888 25,883 19,204 6,561 3,965 1,658 25,001 29,499 28,599 -5,594 -9,919 -9,721


Composition of borrowings is characterized by maturities longer than 1 years with Shell financing its

operations thanks mainly with long term notes and bonds longer than 1 year and in particular with notes with

a residual maturity longer than 2 years. Financial gearing is modest and is backed by a capital structure

which is quite balanced with long term liabilities and equity financing long term assets while current

liabilities (trade payables and other shot term non-financial liabilities) financing short term assets. Both

inventories and receivables are liquid and this gives Shell a quite good ability to convert short-term assets in

cash without big issues and time delays.

Focusing on non-financial debts, Shell has ability to finance operations thanks to supplier’s credit. Looking

at some non-financial debts such as the pension liabilities some considerations could be made. In 2012

company paid around 5.4 USD million in pension expenses (both serviced and interest costs) with little

increase in net pension liability. According to notes of the report, plan assets are invested in a balanced

manner (48% equities, debt securities 40%, real estate 3% and other assets classes 9%) with an expected

return of these assets around 6% per year; a quite important and challenging value that could create some

issue about the value of the plan assets in the next years. However taking into account the company cash

ASSETS

Current Assets

Cash 4.2% 3.3% 5.1%

Receivables 24.5% 25.7% 20.6%

Inventories 9.1% 8.4% 8.5%

Current Assets 37.8% 37.4% 34.3%

Intangible Assets 1.6% 1.3% 1.2%

Property, Plant & Equipment 44.2% 44.0% 47.8%

Equity accounted investments 10.4% 11.0% 10.6%

Investment in securities 1.2% 1.6% 1.4%

Other LT Assets 4.9% 4.7% 4.6%

Long Term assets 62.2% 62.6% 65.7%

ASSETS 100% 100% 100%

LIABILITIES

Current liabilities

Payables 25.0% 25.1% 21.4%

Other ST liabilities 3.3% 3.2% 3.6%

ST Interest Bearing 3.1% 1.9% 2.2%

Current liabilities 31.4% 30.3% 27.2%

LT Interest Bearing 10.7% 8.8% 8.3%

Other LT liabililities 11.5% 11.4% 11.8%

Long term liabilities 22.1% 20.2% 20.1%

Shareholders' equity

Capital stock 0.2% 0.2% 0.2%

Retained earnings 45.7% 48.9% 52.2%

Group Equity 45.9% 49.1% 52.3%

Minority Interests 0.5% 0.4% 0.4%

Equity 46.4% 49.5% 52.7%

SOURCES 100% 100% 100%

flow generation ability, the employee liability amount should not create potential risks to the company

solvency and liquidity.

Finally, it is useful to make an analysis of cash flow statement in order to assess company’s ability to

generate operating cash flow and uses/sources of these cash flows according to these ratios:

- Financial Debt / Operating Cash Flow

- Dividend Paid / Operating Cash Flow

- Dividend Pay-Out (dividends paid in year t / net income year t-1

These figures allow to appreciate the ability of the company to make changes to the financial policy and

ability to limit the financial exposition in terms of operating cash flow. Further dividend policy give insight

about the use of operating cash flow; high dividend pay-out that could be reduced whenever financial

resources could be required to finance extraordinary strategies.

Although operating cash flow in certain cases were negative due to high investment to improve reserves and

greenfield exploration and to certain acquisition in a certain year (such as in the case of BP with the

acquisition in India in 2011) all the companies had significant pay-out ratios and were able to keep their

financial debt under control. Some of these companies operated buy backs in order to redistribute capital to

shareholders and change the capital structure.

Taking into account for these points Shell solvency risks appears very low.

Profitability ratios

Profitability comparison for the companies has been made according to Ebitda figures which have been

reclassified according to homogeneous standards. Amortization and depreciation and revenues from

associates accounted according to the equity method are not part of the Ebitda.

In 2010 - 2012 Shell profitability according to Ebitda was almost the same with a lower value in comparison

with the profitability of Exxon and Chevron. Negative profitability of BP in 2010 was related to high

incidence of production and manufacturing due to Gulf of Mexico Oil well disaster.

Solvency ratios

2010 2011 2012 2010 2011 2012 2010 2011 2012 2010 2011 2012

Financial Debt / OCF 8.4x 2.3x 2.1x 0.3x 0.1x 0.1x 2.3x neg 2.9x -0.5x -0.9x -1.2x

Dividend / OCF 189.1% 45.6% 43.7% 35.0% 26.1% 34.9% 27.3% neg 55.1% 48.9% 55.5% 87.4%

Dividend Pay-out n.a. 36.3% 24.8% n.a. 30.6% 25.4% n.a. -106.2% 21.3% n.a. 32.6% 25.6%

Operating Cash Flow (OCF) 5,276 16,042 17,580 25,062 35,750 29,881 10,775 -3,392 9,765 11,742 11,184 7,874


USD mln 2010 2011 2012 2010 2011 2012 2010 2011 2012 2010 2011 2012

Buy Backs 0 -1,106 -1,492 -12,050 -21,131 -20,875 0 0 0 -306 -3,193 -4,142


All the companies in the sample exhibit higher profitability in the upstream business with downstream facing

some challenges in order to improve profitability and efficiency.

Focusing on Shell, major operating costs are related to raw materials (oil and gas) acquired with an incidence

of about 78% of the sales).

Other profitability ratios for the sample were affected by contribution of financial structure, income from

investments accounted with the equity method, gain on the sale of assets and different effective taxes.

In general profitability levels were deeply related with prices for crude oil and natural gas with rising

profitability that occurred in 2011 a year where oil prices increased by 30%.

It is possible to calculate return on assets and to assess how the company has employed its capital in order to

generate profits. High profitability on sales could not be related to efficiency in the use of capital and hence

low value generation could occur since the company would pay higher cost for its non-efficient use of

capital.

Three measures are calculated:

- ROE: Net Income / Equity shareholders

Ebitda margin


2010 2011 2012 2010 2011 2012 2010 2011 2012 2010 2011 2012

Ebitda mrg % 11.4% 11.9% 11.2% 16.1% 16.1% 15.6% -0.8% 11.4% 6.9% 21.4% 22.4% 22.2%

Income Statement Income Statement - common size

USD mln 2010 2011 2012 2010 2011 2012

Revenues 368,056 470,171 467,153 Revenues 100.0% 100.0% 100.0%

Purchases -283,176 -370,044 -369,725 Purchases -76.9% -78.7% -79.1%

Production & Manufacturing -24,458 -26,458 -26,280 Production & Manufacturing -6.6% -5.6% -5.6%

Selling, distribution, administration -15,528 -14,335 -14,616 Selling, distribution, administration -4.2% -3.0% -3.1%

Research & development -1,019 -1,125 -1,314 Research & development -0.3% -0.2% -0.3%

Exploration -2,036 -2,266 -3,104 Exploration -0.6% -0.5% -0.7%

Ebitda 41,839 55,943 52,114 Ebitda 11.4% 11.9% 11.2%

Depreciation & amortization -15,595 -13,228 -14,615 Depreciation & amortization -4.2% -2.8% -3.1%

Operating Profit 26,244 42,715 37,499 Operating Profit 7.1% 9.1% 8.0%

Financial income 3,147 4,208 3,842 Financial income 0.9% 0.9% 0.8%

Share of result of associates 5,953 8,737 8,948 Share of result of associates 1.6% 1.9% 1.9%

Pretax Income 35,344 55,660 50,289 Pretax Income 9.6% 11.8% 10.8%

Income tax expense -14,870 -24,475 -23,449 Income tax expense -4.0% -5.2% -5.0%

Group Net Income 20,474 31,185 26,840 Group Net Income 5.6% 6.6% 5.7%

Minority interests -347 -267 -248 Minority interests -0.1% -0.1% -0.1%

Net income 20,127 30,918 26,592 Net income 5.5% 6.6% 5.7%

Profitability ratios

2010 2011 2012 2010 2011 2012 2010 2011 2012 2010 2011 2012

Ebitda mrg % 11.4% 11.9% 11.2% 16.1% 16.1% 15.6% -0.8% 11.4% 6.9% 21.4% 22.4% 22.2%

Ebit mrg % 7.1% 9.1% 8.0% 11.7% 12.5% 11.9% -5.1% 7.8% 1.9% 14.1% 16.7% 16.0%

Pretax income % 9.6% 11.8% 10.8% 15.5% 16.9% 18.7% -1.8% 10.2% 4.8% 17.8% 20.8% 21.2%

Net Income % 5.5% 6.6% 5.7% 8.9% 9.5% 10.7% -1.4% 6.7% 2.9% 10.6% 11.8% 12.0%


- ROIC: Net Income / Net Invested Capital

- ROI: Ebit / Total Assets

All these measures refer to accounting measures with ROE and ROIC that takes into account net income, a

measure subject to the effect of the financial expenses, extraordinary gains and the taxes. For this reason the

results of the sample are not really comparable due to the effect of different tax regimes. Finally, these ratios

are subject to some extraordinary gains as already disclosed when speaking about profitability differences.

The most comparable measure is hence ROI which shows as Shell is not the most efficient company.

Return on capital ratios were largely influenced by efficiency in employing the capital; some ratios already

disclosed help to appreciate the higher efficiency of Shell in employing its capital and to explain the ROE

composition according to the DuPont formula.

Main points were related to positive incidence on non-operating incomes (e.g. Interest Burden) which

accounted significantly in 2012 for BP thanks to several extraordinary gains on sale of assets. Decline in

ROE % for Shell was mainly explained by lower operating profitability (Ebit margin) and lower financial

leverage.

5. FINDINGS AND RECOMMENDATIONS

Thanks to global presence and a long term history, Shell has become a recognized leader within the oil & gas

industry. The company is pursuing strategies in order to continuously improve their reserves and to replenish

oil & gas field which are eroded by product consumption. Current strategic programs are tailored to develop

deep water explorations and to improve refining capacity in biofuel industry; on the other side Alaska

explorations were stopped due to environmental issues and at this time it is uncertain if and when they will

restart.

Return on capital ratios

2010 2011 2012 2010 2011 2012 2010 2011 2012 2010 2011 2012

ROE % 13.8% 18.4% 14.2% 21.4% 27.3% 28.7% -3.9% 23.0% 9.5% 18.2% 22.3% 19.3%

ROIC % 11.3% 15.8% 12.8% 19.2% 24.9% 25.9% -3.0% 18.0% 7.6% 19.1% 24.1% 20.6%

ROI % 8.1% 12.4% 10.4% 13.3% 16.4% 15.0% -5.6% 10.0% 2.4% 13.7% 18.3% 15.0%

ROIC = NI / Invested capital

BP ChevronShell Exxon

ROE Disaggregation

2010 2011 2012 2010 2011 2012 2010 2011 2012 2010 2011 2012

EBIT Margin 7.1% 9.1% 8.0% 11.7% 12.5% 11.9% -5.1% 7.8% 1.9% 14.1% 16.7% 16.0%

Interest Burden 134.7% 130.3% 134.1% 132.0% 135.4% 157.8% 34.9% 130.7% 254.9% 126.3% 124.4% 132.3%

Pretax Margin 9.6% 11.8% 10.8% 15.5% 16.9% 18.7% -1.8% 10.2% 4.8% 17.8% 20.8% 21.2%

Tax Burden 57.9% 56.0% 53.4% 59.3% 57.6% 60.6% 69.1% 67.0% 62.1% 59.7% 56.7% 56.8%

Profit Margin 5.6% 6.6% 5.7% 9.2% 9.7% 11.3% -1.2% 6.8% 3.0% 10.6% 11.8% 12.1%

Total Asset Turnover 1.14 1.36 1.30 1.13 1.31 1.26 1.10 1.29 1.26 0.97 1.09 0.94

Return on Assets 6.3% 9.0% 7.4% 10.4% 12.8% 14.3% -1.4% 8.8% 3.8% 10.4% 12.9% 11.3%

Financial Leverage 2.18 2.04 1.91 2.06 2.14 2.01 2.86 2.62 2.52 1.76 1.73 1.71

Return on Equity 13.8% 18.4% 14.2% 21.4% 27.3% 28.7% -3.9% 23.0% 9.5% 18.2% 22.3% 19.3%


Looking at financial for the period 2010 – 2012, company showed quite good profitability, cash flow

generation and efficient return on invested capital. Comparing result with the main competitors Shell

showed, on average, lower profitability and lower return on capital than Exxon and Chevron. In the period

analyzed BP results were deeply impacted by Gulf of Mexico disaster and hence BP comparison could not be

significant due to these issues.

Thanks to good cash flow generation Sheel was able to maintain a stable and satisfactory dividend payout

policy with a limited financial gearing and very low risks concerning liquidity and solvency. Potential value

creation in the next years is being related to price fluctuation of oil and gas but also to the effective

completion of the restructuring and efficiency strategies which are being pursued to the downstream

business.

Limitations to this analysis are related to the use of accounting figures and to historical ratios; future

unexpected shifts of the business model are not incorporated in these figures and could hence lead to

unpredictable effects whenever the consolidation area or the strategies pursued by the company should

change significantly. The financial analysis has been taken according to the public information available at

this date, October the 25th 2013.

6. REFERENCES

Bloomberg, (2012), “Energy: merger and acquisition leagues”

British Petroleum, (2009 – 2012), “Investor Presentations, press releases and company 20F annual reports”

Chevron, (2009 – 2012), “Investor Presentations, press releases and company 10K annual reports”

Dealogic, (2012), “Oil & Gas: merger and acquisition leagues”

ExxonMobil, (2009 – 2012), “Investor Presentations, press releases and company 10K annual reports”

Mitchell, J., Mitchell, B., and Marcel V., (2012), “What next for the Oil and Gas Industry ?”, Chatam House

Robinson, T.R. (2012), “International Financial Statement Analysis”, CFA Institute/John Wiley & sons

Stickney, C. P. (2010), “Financial Reporting, Financial Statement Analysis, and Valuation: a strategic perspective”,

New York: Cengage Learning

Shell, (2009 – 2012), “Investor Presentations, press releases and company 20F annual reports”

7. ANNEXES

Shell

Cash Flow (reclassified)

USD mln 2010 2011 2012

Cash from operations 27,350 36,771 46,140

Capital expenditures -26,940 -26,301 -32,576

Investments in equity accounted -2,050 -1,886 -3,028

Sale of assets 6,916 7,458 7,044

Cash flow from Investing -22,074 -20,729 -28,560

Interest paid -1,312 -1,665 -1,428

Interest received 136 196 193

Sale of securities -34 90 -86

Share repurchases -1,106 -1,492

Dividends paid -9,979 -7,315 -7,682

Net change financial debt 9,256 -7,124 -17

Change non controlling interests 381 8 23

Other financial income/expenses 187 -929 -34

Exchange rate fluctuations -186 -349 201

Cash flow from Financing -1,551 -18,194 -10,322

Free cash flow 3,725 -2,152 7,258

Initial Cash 9,719 13,444 11,292

Final Cash 13,444 11,292 18,550

Income Statement

USD mln 2010 2011 2012

Revenues 368,056 470,171 467,153

Purchases -283,176 -370,044 -369,725

Production & Manufacturing -24,458 -26,458 -26,280

Selling, distribution, administration -15,528 -14,335 -14,616

Research & development -1,019 -1,125 -1,314

Exploration -2,036 -2,266 -3,104

Ebitda 41,839 55,943 52,114

Depreciation & amortization -15,595 -13,228 -14,615

Operating Profit 26,244 42,715 37,499

Financial income 3,147 4,208 3,842

Share of result of associates 5,953 8,737 8,948

Pretax Income 35,344 55,660 50,289

Income tax expense -14,870 -24,475 -23,449

Group Net Income 20,474 31,185 26,840

Minority interests -347 -267 -248

Net income 20,127 30,918 26,592

Balance Sheet

USD mln 2010 2011 2012

Inventories 29,348 28,976 30,781

Receivables 79,072 88,765 74,394

Payables -80,800 -86,767 -77,014

Other assets 15,729 16,140 16,620

Other liabilities -47,648 -50,302 -55,630

Net Working Capital -4,299 -3,188 -10,849

Intangible Assets 5,039 4,521 4,470

Property, Plant & Equipment 142,705 152,071 172,293

Equity accounted investments 33,414 37,990 38,350

Investment in securities 3,809 5,492 4,867

Total Assets 184,967 200,074 219,980

Net Invested Capital 180,668 196,886 209,131

Net Financial Position 30,888 25,883 19,204

Group Equity 148,013 169,517 188,494

Minority Interests 1,767 1,486 1,433

Equity 149,780 171,003 189,927

Sources 180,668 196,886 209,131

ExxonMobil


USD mln 2010 2011 2012


Acquisitions

Investments in PP&E, net -23,610 -19,842 -26,616


Interest paid -259 -247 -327

Dividends paid -8,779 -9,326 -10,419

Stsock repurchases -12,050 -21,131 -20,875

Financial investment changes -472 -1,659 1,082

Financial debt changes -6,210 1,533 -2,825

Change non controlling interests -7 -16 204



Free cash flow -2,868 4,819 -3,062

Initial Cash 10,693 7,825 12,644

Final Cash 7,825 12,644 9,582

Income Statement

USD mln 2010 2011 2012

Revenues 341,578 433,526 420,714

Purchases -197,959 -266,534 -265,149


Selling, distribution, administratio -50,801 -54,956 -49,435


Ebitda 54,882 69,687 65,769

Deprec, amort & impairment -14,760 -15,583 -15,888


Financial income -259 -247 -327


Pretax Income 52,959 73,257 78,726


Group Net Income 31,398 42,206 47,681

Minority interests -938 -1,146 -2,801

Net income 30,460 41,060 44,880

Balance Sheet

USD mln 2010 2011 2012

Inventories 12,976 15,024 14,542

Receivables 32,284 38,642 34,987

Payables -50,034 -56,067 -50,728

Other assets 5,271 6,229 5,008






Total Assets 243,526 258,089 269,335



Group Equity 146,389 154,396 165,863

Minority Interests 5,840 6,348 5,797

Equity 152,229 160,744 171,660

Sources 158,790 164,709 173,318

British Petroleum


USD mln 2010 2011 2012


Acquisitions 6,468 -12,482 -90



Interest paid -1,620 -1,346 -2,606

Dividends paid -2,942 -4,317 -5,376

Net issue of share capital 169 74 122

Financial debt changes 4,114 4,923 3,489


Cash flow from Financing -558 -1,159 -4,307

Free cash flow 10,217 -4,551 5,458

Initial Cash 8,339 18,556 14,005

Final Cash 18,556 14,005 19,463

Income Statement

USD mln 2010 2011 2012

Revenues 297,107 375,713 375,765

Purchases -216,211 -285,133 -292,774


Selling, distribution, administratio -12,555 -13,958 -13,357

Research & development -843 -1,520 -1,475

Ebitda -2,361 42,659 26,075


Operating Profit -15,214 29,244 7,113

Financial income -924 -899 39

Gain on sale of assets 6,074 4,200 7,044


Pretax Income -5,307 38,228 18,131

Income tax expense 1,638 -12,619 -6,880

Group Net Income -3,669 25,609 11,251


Net income -4,064 25,212 11,017

Balance Sheet

USD mln 2010 2011 2012

Inventories 26,218 26,073 28,203

Receivables 42,847 49,327 43,572

Payables -46,329 -52,000 -46,673

Other assets 15,365 12,636 11,806





Equity accounted investments 28,262 21,594 11,612

Held for sale assets 642 2,097 1,858


Total Assets 166,450 189,624 194,938


Cash / cash equivalents -18,556 -14,005 -19,463

Financial assets -1,779 -704 -738

Financial Debt 45,336 44,208 48,800


Group Equity 94,987 111,568 118,546

Minority Interests 904 1,017 1,206

Equity 95,891 112,585 119,752

Sources 120,892 142,084 148,351

Chevron


USD mln 2010 2011 2012


Acquisitions -3,411



Stock buybacks -306 -3,193 -4,142

Dividends paid -5,741 -6,207 -6,885

Financial investment changes -1,303 2,423 6,142

Financial debt changes 882 -2,369 2,047

Exchange rate fluctuations 70 -33 39


Free cash flow 5,344 1,805 5,075

Initial Cash 8,716 14,060 15,865

Final Cash 14,060 15,865 20,940

Income Statement

USD mln 2010 2011 2012

Revenues 180,007 228,743 218,214

Purchases -116,467 -149,923 -140,766


Selling, distribution, administration -4,767 -4,745 -4,724


Ebitda 38,438 51,210 48,426



Financial income -50


Pretax Income 32,055 47,634 46,332


Group Net Income 19,136 27,008 26,336


Net income 19,024 26,895 26,179

Balance Sheet

USD mln 2010 2011 2012

Inventories 5,493 5,543 6,144

Receivables 22,836 24,026 24,050

Payables -19,259 -22,147 -22,776

Other assets 8,729 9,716 11,169





Investments 21,520 22,868 23,718

Total Assets 130,641 150,118 169,706


Net Financial Position -5,594 -9,919 -9,721

Group Equity 105,081 121,382 136,524

Minority Interests 730 799 1,308

Equity 105,811 122,181 137,832

Sources 100,217 112,262 128,111

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