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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
OR
[ ] TRANSITION PERIOD PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from______________________ to _______________________
Commission File Number 1-2475
SHELL OIL COMPANY
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-1299890
(State of Incorporation) (I.R.S. Employer Identification No.)
One Shell Plaza, Houston, Texas 77002
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (713) 241-6161
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
The number of shares of Common Stock, $10.00 par value, outstanding as of
April 30, 1994 - 1,000 shares.
_______________
OMISSION OF CERTAIN INFORMATION
In accordance with General Instruction H of Form 10-Q, the registrant is
omitting Part II, Items 2, 3, and 4 because:
(1) Royal Dutch Petroleum Company, a Netherlands company, and the"Shell"
Transport and Trading Company, public limited company, an English company,
each of which is a reporting company under the Securities Exchange Act of
1934 that has filed all material required to be filed by it pursuant to
Section 13, 14, or 15(d) thereof, own directly or indirectly 60 percent and
40 percent, respectively, of the shares of the companies of the Royal
Dutch/Shell Group of Companies, including all the equity securities of the
registrant; and
(2) during the preceding thirty-six calendar months and any subsequent period
of days, there has not been any material default in the payment of principal,
interest, sinking or purchase fund installment, or any other material default
not cured within thirty days with respect to any indebtedness of the registrant
or its subsidiaries, and there has not been any material default in the payment
by the registrant or its subsidiaries of rentals under material long-term
leases.
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PART I. FINANCIAL INFORMATION
SHELL OIL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
Millions of Dollars
First Quarter
----------------------
1994 1993
------ ------
REVENUES
Sales and other operating revenue . . . . . . . . . . . . . . . . . . . $5,515 $5,611
Less: Consumer excise and sales taxes . . . . . . . . . . . . . . . . . 742 612
------ ------
4,773 4,999
Equity earnings, interest and other income . . . . . . . . . . . . . . . 41 117
------ ------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,814 5,116
------ ------
COSTS AND EXPENSES
Purchases and operating expenses . . . . . . . . . . . . . . . . . . . . 3,629 3,797
Selling, general and administrative expenses . . . . . . . . . . . . . . 222 185
Exploration, including exploratory dry holes . . . . . . . . . . . . . . 35 78
Research expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 39
Depreciation, depletion, amortization and retirements . . . . . . . . . 438 417
Interest and discount amortization . . . . . . . . . . . . . . . . . . . 40 55
Operating taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 154
------ ------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,519 4,725
------ ------
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . 295 391
Federal and Other Income Taxes . . . . . . . . . . . . . . . . . . . . . 116 152
------ ------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 179 $ 239
====== ======
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SHELL OIL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
Millions of Dollars
MARCH 31 DECEMBER 31
---------- -----------
1994 1993
---------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $ 898 $ 1,296
Short-term investments . . . . . . . . . . . . . . . . . . . . . . 150 --
Receivables and prepayments, less allowance for
doubtful accounts . . . . . . . . . . . . . . . . . . . . . . 2,445 2,546
Inventories of oils and chemicals . . . . . . . . . . . . . . . . 745 686
Inventories of materials and supplies . . . . . . . . . . . . . . 224 228
------- -------
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . . . . 4,462 4,756
INVESTMENTS, LONG-TERM RECEIVABLES AND DEFERRED CHARGES . . . . . . . . 3,051 3,015
PROPERTY, PLANT AND EQUIPMENT AT COST, LESS
ACCUMULATED DEPRECIATION, DEPLETION AND
AMORTIZATION OF $17,830 AT MARCH 31, 1994
AND $17,454 AT DECEMBER 31, 1993 . . . . . . . . . . . . . . . . . 19,067 19,080
------- -------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . $26,580 $26,851
======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable - trade . . . . . . . . . . . . . . . . . . . . . $ 1,563 $ 1,689
Other payables and accruals . . . . . . . . . . . . . . . . . . . 686 882
Income, operating and consumer taxes . . . . . . . . . . . . . . . 794 596
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . 1,328 1,316
------- -------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . . 4,371 4,483
LONG-TERM DEBT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,692 1,698
DEFERRED INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . 3,556 3,754
LONG-TERM LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . 2,359 2,292
SHAREHOLDER'S EQUITY
Common stock - 1,000 shares of $10 per share par value . . . . . . -- --
Capital in excess of par value . . . . . . . . . . . . . . . . . . 2,205 2,205
Earnings reinvested . . . . . . . . . . . . . . . . . . . . . . . 12,397 12,419
------- -------
TOTAL SHAREHOLDER'S EQUITY . . . . . . . . . . . . . . . . 14,602 14,624
------- -------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . $26,580 $26,851
======= =======
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SHELL OIL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Millions of Dollars
FIRST QUARTER
--------------------------
1994 1993
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 179 $ 239
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion, amortization and retirements . . . . . . 438 417
Dividends in excess of (less than) equity income . . . . . . . . . 7 (29)
(Increases) decreases in working capital:
Receivables and prepayments . . . . . . . . . . . . . . . 101 34
Inventories . . . . . . . . . . . . . . . . . . . . . . . (55) (61)
Current payables and accruals . . . . . . . . . . . . . . (124) (508)
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . (184) 53
Other noncurrent items . . . . . . . . . . . . . . . . . . . . . . (9) 84
------- -------
Net Cash Provided by Operating Activities . . . . . . . . 353 229
CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . (429) (321)
Proceeds from property sales and salvage . . . . . . . . . . . . . . . -- 248
Other investments and advances . . . . . . . . . . . . . . . . . . . . (128) 32
------- -------
Net Cash Used for Investing Activities . . . . . . . . . . . . (557) (41)
------- -------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES
Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . 27 21
Principal payments on long-term debt . . . . . . . . . . . . . . . . . (20) (252)
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (200) (188)
Increase (decrease) in short-term obligations . . . . . . . . . . . . (1) 46
------- -------
Net Cash Provided by Financing Activities . . . . . . . . . . (194) (373)
------- -------
NET CASH FLOWS
Increase (Decrease) in cash and cash equivalents . . . . . . . . . . . $ (398) $ (185)
======= =======
CASH AND CASH EQUIVALENTS
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . $ 1,296 $ 734
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . (398) (185)
------- -------
Balance at end of period . . . . . . . . . . . . . . . . . . . $ 898 $ 549
======= =======
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OPERATING SEGMENTS INFORMATION
Millions of dollars
FIRST QUARTER
--------------------------
1994 1993
------- --------
Oil and Gas Exploration and Production
Income from Ongoing Operations . . . . . . . . . . . . . . . . . . . . $ 71 $ 118
Other charges* . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
------ ------
Segment Net Income . . . . . . . . . . . . . . . . . . . . . . . . 71 118
Oil Products
Income from Ongoing Operations . . . . . . . . . . . . . . . . . . . . $ 107 $ 88
Other charges* . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14) -
------ ------
Segment Net Income . . . . . . . . . . . . . . . . . . . . . . . . 93 88
Chemical Products
Income from Ongoing Operations . . . . . . . . . . . . . . . . . . . . $ 69 $ 86
Other charges* . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) (6)
------ ------
Segment Net Income . . . . . . . . . . . . . . . . . . . . . . . . 67 80
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (14) $ (7)
Corporate Items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (38) $ (40)
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 179 $ 239
* Amounts associated with major product classifications for which there has
been no revenue stream or investment in the last 5 years.
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SHELL OIL COMPANY AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS
A. INTERIM FINANCIAL STATEMENT MATTERS
The unaudited financial statements and summarized notes of Shell Oil Company
(the Company) and its consolidated subsidiaries (Shell Oil) included in this
report do not include complete financial information and should be read in
conjunction with the Consolidated Financial Statements and the Notes to
Consolidated Financial Statements filed with the Securities and Exchange
Commission in the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993. The financial information presented in the financial
statements included in this report reflects all adjustments which are, in the
opinion of management, necessary for a fair statement of results for the
interim periods presented. Any such adjustments are of a normal recurring
nature, except as may otherwise be described in Management's Discussion and
Analysis of Financial Condition and Results of Operation.
The results for the first quarter of 1994 should not be construed as
necessarily indicative of future financial results.
B. SUMMARIZED FINANCIAL INFORMATION - SHELL PIPE LINE CORPORATION
The following summarized financial information for Shell Pipe Line
Corporation, a wholly owned subsidiary of Shell Oil Company, is presented here
for the information of holders of Shell Pipe Line Corporation's 7 1/2%
Guaranteed Sinking Fund Debentures due 1999, which are fully guaranteed by
Shell Oil Company.
March 31 December 31
---------- -----------
Millions of dollars 1994 1993
---------- -----------
Current assets . . . . . . . . . . . . . . . . . . . . . . . . $130 $115
Noncurrent assets . . . . . . . . . . . . . . . . . . . . . . 297 299
Current Liabilities . . . . . . . . . . . . . . . . . . . . . 48 58
Noncurrent Liabilities . . . . . . . . . . . . . . . . . . . . 72 71
First Quarter
-------------------------------
Millions of dollars 1994 1993*
----------- -----------
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 63 $ 60
Operating income . . . . . . . . . . . . . . . . . . . . . . . 29 27
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . 22 21
* Certain balances have been restated to conform with Shell Oil's consolidated
financial reporting.
C. CONTINGENCIES AND OTHER MATTERS
Shell Oil is subject to a number of possible loss contingencies.
These include actions based upon environmental laws involving present and past
operating and waste disposal locations, private claims, and product liability
actions. In addition, federal, state and local income, property and excise tax
returns are being examined and certain interpretations by Shell Oil of complex
tax statutes, regulations and practices are being challenged.
Shell Oil has received allegations or claims under the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA) or similar
statutes that it is involved at 195 sites, including the Rocky Mountain Arsenal
(RMA) and the McColl site as discussed below. As of March 1994, discussions or
activities were ongoing concerning 115 of these sites, in some cases in the
early stages. During 1993, expenses recorded under CERCLA and such state
statutes relating to the 195 sites were
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approximately $250 million; first quarter 1994 expenses were approximately
$24 million. Shell Oil also has certain obligations under the Resource
Conservation and Recovery Act (RCRA) and similar state laws regarding
corrective action at manufacturing locations and provides assurances regarding
its financial ability to meet certain closure and post-closure obligations that
will arise in the future at such locations under such laws.
The United States and the Company have entered into a consent decree
to settle environmental claims at the RMA whereby the Company would pay 50
percent of amounts expended for remedial costs and natural resource damages up
to $500 million; 35 percent of expenditures between $500 million and $700
million; and 20 percent of expenditures in excess of $700 million. Based on
its proposed remediation alternative, the Company has accrued $500 million for
its share of related costs including the provision of $215 million in 1993 and
$105 million in 1992. The Company's share of expenditures through March 31,
1994 was approximately $222 million. A final remediation plan is not expected
before 1995.
In 1983 the Company was named as one of several potentially
responsible parties for the costs of cleanup of the McColl site which was used
for the disposal of refining waste from 1942 to 1946. The Environmental
Protection Agency (EPA) and the State of California sued the Company and others
in February 1991. In April 1991 the Company and others filed a counterclaim
for contribution naming the United States Department of Defense and others,
since the waste disposal at the McColl site arose primarily from the production
of fuel for the United States military during World War II. In June 1993 the
EPA selected Soft Material Solidification as the remedy, with a contingency for
RCRA equivalent closure. The EPA states that the cost of its remedy is
expected to be $79 million but could go as high as $120 million. In September
1993 the court ruled the Company and other defendants liable for the costs of
remediation but has yet to rule on the counterclaim for contribution.
In December 1993 a Los Angeles Superior Court jury, in two
consolidated lawsuits against the Company and its subsidiary, returned a
verdict for the plaintiffs in the amount of $46.9 million compensatory damages
and $173 million punitive damages. Both cases involve the condition of the
Dominguez oil field. Plaintiffs alleged they were defrauded, that the oil and
gas lease was breached, and that soil contamination on the property constitutes
a continuing trespass. Final resolution through the appeals' process could
take two or more years. The Company and its subsidiary believe the verdict was
wrong and expect ultimately to prevail in the litigation.
The Company is party to a litigation regarding Nemagon(R), an
agricultural chemical containing DBCP manufactured and sold by it from 1955 to
1978. In California, the claims involved alleged contamination of water wells
based on recent revisions to governmental standards. The claims in the
litigation seek the cost of cleanup and future monitoring of such water wells.
The Company is a co-defendant in these cases with other substantial
manufacturers and suppliers of the same chemical. In Texas, ten cases,
including three alleged class actions, were filed in 1993 against the Company,
other substantial manufacturers and suppliers of DBCP and various banana
growers. These actions allege that the plaintiffs suffer fertility problems
arising from exposure to DBCP while working on banana plantations outside the
United States. The Company is contesting whether any injury has in fact been
incurred by plaintiffs, whether DBCP was in fact the cause of any such injury
as may exist, and in any case if the Company was a supplier or otherwise has
liability in connection with any such injury.
Since 1984 the Company has been named as a defendant in numerous
product liability cases, including class actions, involving the failure of
plumbing systems in the U.S. constructed with polybutylene plastic pipe. The
Company manufactured the resin used to make the pipe in these systems. Two
other substantial manufacturers made the resins for the polyacetal fittings
used in these systems and are also defendants in these cases, as are the
fabricators and installers of the systems. The plaintiffs in the litigation
claim actual and punitive damages arising primarily from leaking residential
plumbing systems. The Company's position and most of the judgments to date
have confirmed that most of the leaks have occurred due to failure of the
polyacetal fitting system, which is no longer used. Almost all the current
claims outside of litigation are handled through a joint venture established by
the Company and two other co-defendants. The joint venture makes arrangements
for the repair of leaking
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polybutylene pipe systems, the costs of which are allocated on a variable basis
depending on the component part manufacturer and the producer of the polyacetal
resin used.
The Company is attempting to establish insurance coverage at the RMA
through 1969 and for the McColl site and other environmental claims.
Declaratory judgment actions have also been filed to confirm insurance covering
polybutylene through 1985 and insurance covering Nemagon(R) claims.
The Company's assessment of these matters is continuing. Future
provisions may be required as administrative and judicial proceedings progress
and the scope and nature of remediation programs and related costs estimates
are clarified. However, while periodic results may be significantly affected
by these matters, based upon developments to date, the management of the
Company anticipates that the Company will be able to meet related obligations
without material adverse effect on its financial position.
________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Shell Oil Company earned $179 million in the first quarter of 1994,
compared with $239 million in the first quarter of 1993. Adjusted for special
items in both periods, net income improved $29 million.
The key factors in Shell Oil's improved earnings were lower operating
costs and higher refined products margins and sales volumes, which more than
offset the effects of significantly lower crude oil prices.
The decline in domestic crude oil prices, which began during the
second half of 1993, led to prices in the first quarter of 1994 about $4.50 a
barrel lower than in the 1993 quarter. As a result, earnings in Oil and Gas
Exploration and Production declined. Oil Products earnings benefited,
however, from stronger margins and higher refined product sales volumes. In
Chemical Products, benefits from higher sales volumes were mostly offset by
lower margins.
In total, special items reduced earnings $40 million in the first
quarter of 1994, compared to benefits of $49 million in 1993.
Cash flows from operating activities totaled $353 million in the first
quarter of 1994, an increase of $124 million. Capital expenditures were $429
million, an increase of $108 million, primarily related to oil products
activities. Revenues were $4.8 billion, down $300 million, primarily due to
lower prices.
OIL AND GAS EXPLORATION AND PRODUCTION
Oil and Gas Exploration and Production earnings from ongoing
operations in the first quarter of 1994 was $71 million, a decrease of
$47 million from 1993. Excluding special items, segment net income
declined $31 million.
Lower crude oil prices and production in the first quarter of 1994
compared with 1993 more than offset the significant benefits from lower
operating costs and higher natural gas prices. Domestic crude oil prices
averaged $10.88 per barrel, the lowest average price for any quarter in almost
eight years. Gas prices in the 1994 quarter averaged about 20 percent higher
than in 1993.
Crude oil production in the first quarter of 1994 declined from the
same period last year due in part to property sales during 1993. In addition,
international production declined reflecting the restructuring of Syrian
interests. Natural gas production increased about 3 percent.
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OIL PRODUCTS
Oil Products earnings from ongoing operations were $107 million in the
first quarter of 1994, an increase of $19 million over the same 1993 quarter.
Earnings from ongoing operations exclude charges to segment net income which
are associated with major product classifications for which there has been no
revenue stream or investment for the past five years. Oil Products segment
net income was $93 million in the 1994 quarter, an increase of $5 million over
the same 1993 period. Excluding special items from both periods, segment net
income in 1994 improved $58 million.
Operating results in the 1994 quarter showed marked improvements from
lower operating costs, improved refined product margins and higher sales
volumes. Sales volumes increased 6 percent over the same 1993 period, in part
due to increased gasoline sales volumes.
CHEMICAL PRODUCTS
Chemical Products earnings from ongoing operations in the first
quarter of 1994 were $69 million, a decrease of $17 million from 1993.
Chemical Products segment net income was $67 million in the first quarter of
1994, a decrease of $13 million compared to the same 1993 period. Excluding
special items from both periods, segment net income improved slightly.
On an operating basis, margins were impaired primarily in downstream
businesses. However, this decline was more than offset by increased sales
volumes, mostly in commodity chemicals and resins.
OTHER
The other operating segment incurred a net loss of $14 million in the
first quarter of 1994, compared with a $7 million loss in 1993.
CORPORATE ITEMS
Corporate charges totaled $38 million in the first quarter of 1994,
compared with $40 million in the same quarter last year. Lower interest expense
in 1994 due to lower average debt was the primary factor contributing to the
decline.
FINANCIAL CONDITION
CAPITAL RESOURCES AND LIQUIDITY
Cash flow provided by operating activities totaled $353 million for
the first quarter of 1994, compared with $229 million last year, an increase of
$124 million. The increase was mainly due to lower working capital
requirements. The major uses of cash generated from operating activities and a
draw on cash balances of $398 million in the first quarter of 1994 were for
capital expenditures of $429 million and other investments of $128 million, and
a dividend payment of $200 million.
OTHER MATTERS
In addition to the economic conditions and other matters discussed
above affecting Shell Oil, the operations, earnings and financial condition of
Shell Oil may be affected by political developments; litigation; and
legislation, regulation and other actions taken by federal, state, local and
international governmental entities, including those matters discussed in
Note C of the Notes to Interim Financial Statements.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As discussed in the Company's 1993 Report on Form 10-K, in June 1992,
the Attorney General of the State of Rhode Island filed an action against the
Company in the United States District court for the District of Rhode Island
under the Rhode Island Clean Water, Oil Pollution Control and Hazardous Waste
Management Acts. The action arose out of alleged hydrocarbon seepage under a
roadway adjacent to a Company service station and sought penalties in excess of
$1,000,000. In February 1994, the matter was settled for $425,000. No
penalties were imposed on the Company.
In July 1992, the United States Environmental Protection Agency (EPA),
Region IX, issued a Notice of Violation to Shell Western E&P Inc. (SWEPI), a
wholly-owned subsidiary of the Company, for alleged violations of air pollution
rules and regulations at two heavy-oil dehydration facilities in Kern County,
California. In September 1993, EPA issued a revised Notice of Violation.
Pending execution and filing of appropriate documents, EPA and SWEPI have
agreed to settle EPA's claims for $337,703; the settlement is not an admission
of any violations.
In February 1994, the Company received a notice letter from the
Attorney General's Office of the State of California informing that the
California Department of Toxic Substances Control had asked the Office to
initiate an enforcement proceeding against the Company's Martinez Manufacturing
Complex regarding alleged violations of state hazardous waste statutes and
regulations by that facility. No action has yet been filed; the Company and
the Attorney General's Office are engaging in discussions to resolve the matter
prior to the filing of any complaint.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
12. Computation of Ratio of Earnings to Fixed Charges.
(b) Reports on Form 8-K.
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SHELL OIL COMPANY
H. E. BLECHL
By________________________________
H. E. Blechl, Controller
(Principal Accounting and
Duly Authorized Officer)
Date: May 5, 1994
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INDEX TO EXHIBITS
Exhibit Page
Number Description Number
- - ------ ----------- ------
12 Computation of Ratio of Earnings to Fixed Charges . . . . . . . . . . . 12
11