NOVEMBER 1 ST 2016 WEBCAST TO ANALYSTS BY SIMON HENRY, CHIEF FINANCIAL OFFICER OF Ladies and gentlemen, welcome to today s presentation. We ve announced our third quarter results this morning. Let me give you a summary, and of course there will be plenty of time for your questions. I will be joined by Maarten Wetselaar Director Integrated Gas and new energies for the Q&A session. We thought it would be useful for you if the business directors joined me on these calls from time to time. Before we start, let me highlight the disclaimer statement. Shell delivered better results this quarter, reflecting strong underlying operational and cost performance. But, lower oil prices continue to be a significant challenge across the business, and the outlook remains uncertain. We ve delivered some $3 billion of underlying CCS earnings in the quarter and $7 billion over the last 12 months. The integration of Shell and BG is now essentially done and has been completed well ahead of plan. The integration is proving to be an important catalyst as we make significant and lasting changes to the company s working practices, cost structures and portfolio. Our underlying operational costs in 2016 are already at an annualised run rate of $40 billion, which is $9 billion lower than Shell and BG costs in 2014, and should reduce further on a likefor-like basis as deal synergies and improvements are delivered. We are delivering on lower and more predictable investment plans, around $29 billion this year of which some $3 billion is non-cash. Capital investment for 2017 is expected to be around $25 billion which is at the low end of our $25-$30 billion range. We are actively working on 16 material asset sales as part of the $30 billion divestment plan and delivering profitable new projects; start-ups in 2016 are expected to add more than 250 thousand boe per day when fully ramped up. Turning to the results. Excluding identified items, Shell s CCS earnings were $2.8 billion, which is an 8% decrease in earnings per share from the third quarter of 2015. On a Q3 to Q3 basis we saw higher earnings in Upstream and Integrated Gas and lower earnings in Downstream. Return on average capital employed was 2.8%, and cash flow in the quarter was $8.5 billion. Our dividends distributed in the third quarter of 2016 were $3.8 billion, or $0.47 cents per share, of which $1.1 billion were settled under the scrip programme. Brent oil prices were some 10% lower than year-ago levels and realised gas prices were some 30% lower than yearago levels. Lower oil and gas prices reduced these results by around $1 billion and our Refining and Trading results were significantly lower than in the same quarter last year, reflecting the weaker global refining conditions.
Uplift from BG volumes, lower costs despite the increase related to the consolidation of BG, and lower well write-offs have combined to deliver a profitable quarter here, despite lower oil prices. The usual waterfall charts are provided in the back-up where you will find details of the earnings for each business segment. As is normal for large transactions, such as BG, we have been reviewing the accounting treatment. This quarter, this resulted in an increase in goodwill by $1.5 billion to $10.5 billion. There was a help to earnings of some $250 million in the Q3 figures, as a result of the revision to the PPA for BG. You will see full details of all this in the results announcement. Moving to production. Headline oil and gas production for the third quarter was 3.6 million boe per day, which is 25% higher than Q3 of the previous year. Uplift from the BG acquisition accounts for the majority of that increase. I think it s important to point out that our Upstream operating performance continues to improve, with a focus on margins, reliability and uptime that is delivering and a decline in operating costs. LNG volumes were also higher, mainly reflecting higher volumes as a result of the BG acquisition. Turning to our cash position. The priorities for cash have not changed, debt reduction, dividends, then capital investment and share buy-backs. Cash flow from operations on a 12- month rolling basis was some $17 billion, at an average Brent price of around $42 per barrel. Cash balances increased by $5 billion in the quarter, as a result of free cash flow performance and debt increase. Depreciation for the third quarter was $6.2 billion and on an underlying basis this was $5.4 billion. We are expecting an annual DD&A of some $22 billion on today s portfolio, with Downstream approximately $4 billion of that. This $22 billion figure is substantially increased with our new portfolio, $17 billion underlying DD&A in 2015. Gearing at the end of the quarter was 29%. And as we have said before, we are managing the company through the down-cycle by pulling on significant financial and operating levers. Let me update you on that. Firstly, asset sales. We are using asset sales as an important element of the strategy to re-shape the company. Up to 10% of Shell s oil and gas production is earmarked for sale, including several country positions and a number of midstream assets to our MLP, and Downstream positions. 16 separate asset sales transactions of a material nature are in progress, consistent with increasing the cash contribution towards the planned $30 billion divestment programme. This is a value-driven - not a time-driven - divestment programme, and an integral element of Shell s portfolio improvement plan. As we ve said before, we re not planning for asset sales at give-away prices. There s no reason today to think that the $30 billion figure won t be achieved. Year to date, there are some $5 billion of divestments visible to you, getting us closer to the $6 to $8 billion guidance we gave you for 2016, and further deals in the pipeline. I ll move on to spending. We continue to reduce capital spending and we continue to reduce costs across the board. Capital investment for 2016 is on-track at $29 billion, of which $3 billion is non-cash, and capital investment for 2017 is expected to be around $25 billion which is at the low end of our $25-$30 billion range. Our underlying operational costs in 2016 are already at an annualised run rate of $40 billion, which is $9 billion almost 20% lower than
Shell and BG costs in 2014, and should reduce further on a like-for-like basis as deal synergies and improvements are delivered. In short we absorb BG s costs and spend in Shell this year. With no increase overall on a combined basis. The fourth lever is of course delivering profitable new projects that turn investment into free cash flow. By 2018, start-ups since 2014 in the combined Shell and BG portfolios should be producing more than 1 million barrels per day, high margin barrels, some $10 billion of CFFO annually at average $60 oil prices, with cash operating costs around $15 dollars per barrel and a 35% statutory tax rate. In the third quarter we have seen the start-up of Stones in the Gulf of Mexico, first cargo from Gorgon in Australia and first export of crude oil was reached at Kashagan in Kazakhstan. I ll now turn to LNG supply and demand market dynamics. The LNG industry is in the midst of a large series of supply capacity additions, with over 100 mtpa of LNG capacity either under construction or having recently started operation. The majority of these capacity additions are in Australia and the United States of America. As a result, in comparing with the same period last year, so far during 2016 the market has grown with an additional 12 million tonnes of LNG volumes, mostly from Australia. We re observing a healthy growth on the demand side, more than compensating for the declines in the traditional North Asia markets and Latin American market. This year s demand growth has been especially strong in the Middle East, particularly in Egypt, Jordan and Pakistan, increasing the Middle East LNG demand by approximately 8 million tonnes. The growing role of both India and China in the global energy mix has been mirrored in this year s LNG growth each increasing with approximately 4 million tonnes so far. In the case of China, the increase is mostly a result of ramp-up of contractual volumes whereas in India we re observing the effects of lower prices, policies in power and fertilizer and poor domestic production. As a result, the global LNG market is relying less on Europe as the LNG balancing market with the benefits of LNG finding its way to an increasingly larger and diversified customer base. Maarten, I am sure, can go into more details on this in the Q&A. Let me sum up. Our investment plans and portfolio actions are focused firmly on reshaping Shell into a world-class investment case, at all points in the oil-price cycle, through stronger returns, and improved free cash flow per share. We are making good progress towards this aim in spite of current challenging market conditions. In parallel with the integration of BG, we have been managing the company through the down-cycle by reducing costs, investment levels, while executing our asset sales plans and starting up profitable new projects. With that, let s take your questions and as I mentioned, Maarten is here with me as well. Please could we have just one or two each, so that everyone has the opportunity to ask a question. Operator, please poll for questions. Thank you for your questions and for joining the call today. We will be having an investor day in New York, on November 8th and Ben and I, and other members of the Executive team, look forward to talking with you then.
NOVEMBER 1 ST 2016 WWW.SHELL.COM/IR
DEFINITIONS AND CAUTIONARY NOTE NOT FOR RELEASE, PRESENTATION, PUBLICATION OR DISTRIBUTION IN WHOLE OR IN PART IN, INTO OR FROM ANY JURISIDICTION WHERE TO DO SO WOULD CONSTITUTE A VIOLATION OF THE RELEVANT LAWS OF SUCH JURISDICTION. Reserves: Our use of the term reserves in this presentation means SEC proved oil and gas reserves. Resources: Our use of the term resources in this presentation includes quantities of oil and gas not yet classified as SEC proved oil and gas reserves. Resources are consistent with the Society of Petroleum Engineers (SPE) 2P + 2C definitions. Resources and potential: Our use of the term resources and potential are consistent with SPE 2P + 2C + 2U definitions. Organic: Our use of the term Organic includes SEC proved oil and gas reserves excluding changes resulting from acquisitions, divestments and year-average pricing impact. Shales: Our use of the term shales refers to tight, shale and coal bed methane oil and gas acreage. Underlying operating cost is defined as operating cost less identified items. A reconciliation can be found in the quarterly results announcement. The companies in which Royal Dutch Shell plc directly and indirectly owns investments are separate legal entities. In this release 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 release refer to companies 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. 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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 release, 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 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. There can be no assurance that future dividend payments will match or exceed previous dividend payments. All forward-looking statements contained in this release 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 20-F for the year ended December 31, 2015 (available at www.shell.com/investor and www.sec.gov ). These risk factors also expressly qualify all forwardlooking statements contained in this release and should be considered by the reader. Each forward-looking statement speaks only as of the date of this release, November 1, 2016. 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 release. With respect to operating costs synergies indicated, such savings and efficiencies in procurement spend include economies of scale, specification standardisation and operating efficiencies across operating, capital and raw material cost areas. We may have used certain terms, such as resources, in this release that 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.