殼牌 (SHEL) 2003 Q2 法說會逐字稿

Ladies and gentlemen thank you for holding.

I will now hold the conference over to Sir Phillip Watts.

Go ahead sir.

Thank you very much and welcome to this teleconference on the Royal Dutch Shell interim results.

I am Sir Phillip Watts, I've got Judy Boynton and Simon Henry.

Judy as you know has been our Director of Finance and Chief Financial Officer since 2001, since we last spoke to you.

I'm very pleased that she has become a group Managing Director and Managing Director of Shell Transport.

Simon will be familiar to you as our Head of Investor Relations.

Judy and I will start by telling you about our performance this year.

And the progress we're making to -- in achieving our strategic goals.

Then we'll be pleased to answer your questions.

The slides for the presentation will appear on the web as we speak.

But for those of you following on the download documents, we will tell you as we move to each new slide.

First, on the neck slide, this is probably the most interesting slide of the whole presentation.

Let me draw your attention to the standard disclaimer.

I'll give you sometime to read it.

I said that we would tell you good the progress we're making in achieving our strategic goals.

We've got much to report.

But first let me remind you of what we aim to do.

This next slide illustrates our strategic direction.

It shows how we are developing our portfolio, shifting the balance of investment towards upstream and gas projects, while maintaining profitable downstream growth over the short, medium and longer term.

Our short-term priority after the conscious decision to dilute our returns by making key strategic acquisitions last year, is to ensure we deliver underlying performance improvements.

Over the medium term we are delivering a success of new projects.

And we're creating the new legacy positions which will provide long-term value.

Our aim is to provide higher average returns across the cycle, in an uncertain and difficult world.

As I've said before I believe that our ability to do this is greatly enhanced by the unique diversity of our portfolio which offers both a wealth of exciting opportunities and great resilience.

On this next chart, our excellent results in the first half of 2003 confirmed that we are continuing to deliver robust profitability.

Net income of $8.2 billion was 82% up on the first half of last year.

Adjusted CCS earnings of $7.3 billion rose by 73%. $12 billion in cash from operations was 90% higher.

This strong cash generation was supplemented by more than $2 billion in divestment proceeds in the first half alone.

Underlying capital investment was $6.1 billion.

This was in line with our plans.

However, as we will explain, our capital expending for the year, capital spending for the year will be raised by some incremental investment in attractive upstream opportunities.

The return on average capital employed was 17.4%, on a CCS earnings basis.

I think this adds up to a very strong performance, building on our strong competitive position in the first quarter.

The next slide shows what it's all about.

Being able to fulfill our long standing policy of raising dividends in line with local inflation over time.

The interim dividends of .74 euro for Royal Dutch and 6.1 Pence for Transport are 2.8 and 2.5 percentage points up.

Of course in dollar terms, the currency in which most of our earnings are denominated, the bar has been set considerably higher this year.

At current rates of exchange, the cash required for dividends paid in 2003 will be 28% higher than in 2000.

Up about $1.5 billion to around $6.5 billion.

The financial figures reflect a very busy and productive six months.

The next chart shows some of the highlights.

Delivering the [Athabasca] oil sands project and getting the under way were very significant highlights.

I'll discuss their importance later.

In [Kazakstan] we extended our interest in giant [Inaudible] field, and acquired other acreage.

And in Oil Products we are make great progress in converting the weaker signs acquired in U.S. and Germany last year to the Global Shell standard.

Significant divestment including our interest in Royal Gas and more recently in [Tiesen Gas].

There have been a wide range of other actions to upgrade our portfolio which together have added significant value such as the Australian and U.K. retail alliances.

And as the next slide shows, we're starting the third quarter running with a range of important actions.

Gaining access to acreage in Saudi Arabia for gas exploration in a major venture with Saudi Aramco in [Toto] the major break through.

This is the first time in recent years that international companies has gained access to the kingdom's huge potential.

The focused exploration scheme is more economically attractive than the previously discussed integrated projects.

We've invested in two more wind projects in July.

Another in Texas, and our first in Spain.

The significant divestment activity in the first half continues.

In July we divested upstream assets in the Gulf of Mexico worth over $500 million and also in the U.K.

North Sea.

A third long term LNG supply deal for [Satalen] with [Ueingshu] electric in Japan has been announced today. [Inaudible] project in Brazil is imminent.

Peak production it will add some 60,000 barrels a day oil equivalent to our daily production.

It is the first offshore project in Brazil carried out by an international company and a milestone in the development of our business there.

It also confirms our continuing leadership in global deep water.

The sale of the XL lubricant space oil font in the U.S. is on track to be completed by the end of the month.

This activity demonstrates the drive and energy which invigorates all of our businesses now.

Now, at this point let me hand over to Judy to tell you about our performance in the second quarter.

And how we are maintaining the financial framework which underpins our strategy.

And I'll come back and say something about our strategic progress.

Thanks, Bill.

Let me start with the standard step chart, showing the factors behind the significant rise in earnings between the second quarters of this year and last.

Exploration and production earnings rose by 12% with higher prices.

Gas prices were significantly higher.

The Henry hub index was almost 2.25 per BTU and oil prices were up higher.

Gas and power earnings nearly troubled because of higher LNG volume prices, the trading earnings and income from the sale of our share in Gas.

The 26% rise in LNG volumes was also an impressive achievements given the loss of the mall Asian Satu contribution.

Oil product earnings rose by 181% with support of better marketing margins.

Unit cost reductions underpinned these results.

Collectively the businesses have achieved about half the full-year target at mid year but lower volumes are a challenge in EP and OP.

As Phil said the strong performance.

One of our key strategic goals is to increase the upstream waiting in our portfolio and the next chart shows that we're doing just that.

We're on track to deliver our planned capital investment of $12 billion for the year.

And we're doing this in line with our priority, 4.5 of the $6.1 billion invested in the first half was an upstream or gas.

We're also taking up some attractive incremental upstream opportunities such as the additional interest in Kazakstan for $400 million.

This reported capital expenditure for the year likely to be $2 billion more then planed and this includes 100% of the expenditure on the Sakalin joint venture.

We've also repurchased minority interest in some of our U.S. offshore upstream assets for $700 million.

The way we're upgrading our portfolio in line with our strategic [Inaudible] can be seen in the breakdown of capital employed.

The share accounted for by EP and GP has risen from 49-51% since the end of 2001, as capital employed has grown from $65-89 billion.

The cash cycle drives our financial framework and the next slide explains our priorities for fine cash.

Our underlying cash generation has been very strong.

Net adjusted cash flow of $12 billion is nearly double that in the first half of last year.

And as Phil mentioned this has been augmented by $2 billion from our significant divestment activity.

On other side of the equation we need to fund our dividend commitments raised in dollar terms by the exchange rate movement as well as option hedging, interest and planned capital expenditures.

As we've explained our financial framework is based on cash neutrality and conservative conditions, and we manage our financial position for the long run.

And we've chosen this year to give priority to incremental value-creating investment and reducing debt.

Lowering our headline gearing to 19% at the end of quarter 2.

And we still have to fund some of the incremental investment including BAYA which was paid for on July 2nd and the extra interest in Cashagan.

We will continue to consider investment as well as divestments as part of the managing of our balance sheet.

There will be no further share buy back cancellation this year.

Balance sheet management to an attractive incremental investment opportunities will continue to take priority.

The next slide shows how we've delivered consistently competitive returns.

The rise to over 17% since the second quarter of 2002 was mainly due to higher prices and margins.

Divestment income offset the production from exchange rates and there was also an underlying contribution from operational improvements.

More importantly our reported ROM out has been at or close to the top of the competitive range on a competitive basis since the beginning of 2000.

We understood that our strategic acquisitions in 2002 would dilute returns in the medium term.

We're pleased that so far this has not materially affected our competitive position although we'll still have to see how others fare in the second quarter.

Next chart covers the impact of developments in the reporting framework.

These are as a result of Sarbanes-Oxley, IAS in Europe and other changes.

Our reputation for good governance and transparency is very important to us and we'll be very clear about how the changes might affect us.

At present we can only estimate the potential impact but we can see two types of effect.

Firstly, reducing the use of specials, and the accounting for trading items, will make our quarterly results more volatile.

By may be $200 million a quarter, either way.

This is unlikely to have a material long-term impact on either earnings or cash flow.

Secondly, as explained in our 2002 financial statements, recent changes in U.S.

GAAP relating to long-term obligations have brought U.S. and Dutch GAAP into closer alignment.

As a result some $4 billion of additional fixed assets and related long term liabilities will be added to the group's balance sheet from the third quarter.

This will have no impact on cash flow or underlying economics.

Now, all of this is a moving target and we still have to assess exactly what these changes entail and how they'll affect us.

But be assured that we'll continue to be transparent about any impact as we understand it.

Before handing back to Phil let me return to the central issue of our dividend policy.

As this slide shows, our commitment to steadily growing dividends has resulted in dividend yields that are highly competitive with other blue chip investments.

For example, our yield comfortably exceeds three-year treasury bonds in Amsterdam in London and in New York where it's more than double.

This comes from our focus on the financial framework as an essential underpinning of our strategy and our commitment to maintaining our dividend policy.

On that note let me pass it back to you, Phil.

So you can talk about achieving our strategic goals.

Thank you, Judy.

As the next chart shows, we're making steady progress in developing our portfolio in line with our strategy.

Bringing on-stream projects in Canada, Nigeria, Malaysia, and Brazil.

Building new legacy positions in Athabasca [Inaudible], Kazakstan, and now Saudi Arabia.

Pushing forward projects such as the [Inaudible] and Bonga deep water development in Gulf of Mexico and Nigeria and the range of LNG plant extension and the [Nan-hai] petrol-chemical complex now under construction in [Quan-Dong] province.

Establishing important new retail alliances in Britain and Australia and of course continuing to integrate our acquisitions and deliver synergies.

Let me focus on two projects which are of particular long-term significance, Athabasca and Sakhalin.

The Athabasca oil sands project is both a significant source of production and cash flow today and an important platform for future growth.

Full production the project will add over 90,000 barrels a day to our daily oil production nearly 4% of last year's total production.

It’s strong cash flow is enhanced by the integration which Shell Canada's highly efficient Scottford refinery.

And with a resource base of 9 billion barrels in the leases that we have there's a major scope for growth.

And we're evaluating the possibilities.

Importance of these oil sands is a secure resource of fuel for North America, shouldn't be underestimated.

Nor should our capacity to continue driving down the costs and meeting the environmental challenges.

The delivery of the Athabasca project was an important milestone in establishment of one new legacy position.

Let me turn to another, with the next chart.

Getting the giant Sakhalin II scheme under way.

Sakhalin is a unique project requiring unique capabilities.

Business development, financial, technical, project management commercial.

First is the ability to develop the necessary relationships to enable such a groundbreaking development in Russia, being able to do so under a grandfathered production sharing agreement was very important for such major investments.

Undertaking such a massive and complex project, the largest integrated oil and gas developments in a remote and undeveloped area demands particular skills.

Frankly very few companies can genuinely claim to have such capabilities.

I believe that our experience and record of delivery in Shell is unrivalled.

Project depends of course on our unique commercial relationships in Asian LNG markets.

The third deal has been announced today, following those from Tokyo Gas and Tokyo Electric, we now have this third deal with Kyoshu Electric, we are developing other opportunities in Japan, Korea, China, and the west course of North America.

Project has 4 billion barrels of oil equivalence of resources and will provide more over 5 million tons of LNG equity a year, that is nearly 60% on top of our 2002 sales.

It is a milestone in the development of new business opportunities in Russia and in the Pacific basin LNG markets.

Of course, developing our portfolio is not just a matter of developing new projects and positions.

It also means selling or swapping assets that no longer contribute to our strategic progress.

As you can see our activity in this area is not confined to the big tight items.

All of our businesses are constantly looking for opportunities to strengthen the portfolio, and realize value.

And as you see on the next chart this focus is no flash in the pan.

We have strong record of divestments over the years, continuous upgrading as well as major restructuring.

Divestments serve two purposes.

They are essential for recycling capital from poorly performing or non-strategic assets to new, higher-value opportunities.

They're also a flexible tool for balance sheet management.

Following last year's major investments, we stated that we expected to continue divesting around $2 billion a year.

We've already achieved this in the first half of 2003.

Mostly from Ruhr Gas and Tiesen Gas.

There is more to come from completing sales in the Gulf of Mexico and North Sea and Swedish projects and U.S. pipelines which are underway.

These additional transactions are expected to add a further $1 billion and there are even more in the pipeline.

Now, what about these acquisitions that we made?

On this next chart, realizing the value from our acquisitions is fundamental for our strategy.

We're making excellent progress.

Ahead of schedule in every case.

Overall, we're now over two-thirds of the way towards our announced $1 billion from the four acquisitions by the end of 2004.

And only $50 million more to achieve the targets for the end of this year.

This year's target has already been reached by Equilon and Motiva and exceeded in Daya.

Enterprise is very close to it.

Pace has been driven by rapid operational integration of all of those businesses which is virtually complete.

We are identifying additional synergies but I think it's better to focus first on fulfilling all of the promises that we previously made.

The acquisitions have contributed an additional $2.1 billion in cash flow, $1.7 billion from Enterprise alone.

And they're adding value for our shareholders as we said they would.

Another example is with Daya where the required remedies have been achieved, those are the remedies requested by [bruselse] through a succession of 21 deals, some involving swaps of assets, strengthening our positions in other markets such as Poland and Checia.

On that note let me turn to the downstream where the next chart shows we've established our position as the downstream global competitive leader.

We still have to see how our competitors have fared in the second quarter but we're very pleased with our strong performance to date this year.

This global leadership has been achieved despite a poorer competitive position in the U.S.

Where, as you know, we're now able to apply our international capabilities to rectify that situation.

The better second quarter results there, despite lower margins, show that we're making progress.

But it's still a long way short of the potential, and we know that we have still much to do.

The next slide shows some of the U.S. improvements, including a 30% reduction in overheads.

This reflects the faster delivery of those synergies.

We're also making progress on reducing unplanned refinery stoppages although more slowly than I would have liked.

Our target is 4% lost time, first quartile performance.

We have considerable experience of achieving this -- achieving such organizational and cultural transformations and we never expected it to be rapid.

On the retail side the major efforts on rationalization re-branding and refurbishment needed to make a world class network is going well and delivering results.

Re-branding is on schedule with 30% of the sites completed, focusing on those markets where we're first or second.

So is the upgrading of Shell sites to our global standard with over 40% completed.

One measure of this progress is the success of the conversion of Texaco to Shell gasoline credit cards.

When 90% of those who have received the new cards are using them regularly.

There's been significant improvement in network efficiency as we sell more from fewer sites.

So we're on track to deliver the 12% returns in the U.S. by the end of 2004.

Now, Judy discussed our very competitive performance on reported Rolachi.

Let me turn to our neck chart to normalized returns.

In making our strategic acquisitions in 2002, we understood that our returns would be diluted by our acquisitions and later, we also advised you about the impact of lower pension fund credits.

In total, these factors have had an effect of around 1%.

The turns have also been affected by exchange rate movements which are not affected in our normalization calculation.

The impact here is around a further 1%.

It's worth pointing out that some of the factors affecting normalized returns don't effect cash flow such as the currency effect on the balance sheet.

Returning these normalized returns to our desired range has been and remains a priority.

We've spoken earlier about the underlying business improvements necessary to do so.

Synergies, cost reductions, portfolio upgrading, and volume growth are on track, and are a constant focus.

We aim to meet our targets, in each of these areas, with overall performance that is equivalent in cash and economic terms to what we said before.

The importance of the [Rurgas] sale on our reported [Inaudible] is clear on the slide and making a significant contribution to offset the dilution caused by the acquisitions in 2002.

The next chart focuses on cash flow.

And how we're going to -- how we're using it to meet our commitments and pursue our strategic goals.

Generating the cash to fund dividends, debt service, and capital investment is a key driver of the required returns from the portfolio.

We have a record of strong and consistent cash generation.

Divestment has always been an important element of this.

Our financial framework is based on some key parameters.

We seek to grow our dividends by at least local currency inflation over time.

We value our strong credit rating.

And we aim to invest in a disciplined and focused way to deliver steady growth in our capital base.

On that basis, we believe that our priorities this year should be, as Judy said, on balance sheet management and attractive incremental investment.

Which is why there will be no further share buy backs for cancellation this year.

Turning to my last slide, how do we see the way forward?

Foundation is the robust delivery of performance.

As I believe we've demonstrated over the last years.

And we go forward on the basis of our clear strategy and strong financial framework.

Focusing on achieving the improvements necessary for sustainable competitive returns.

Delivering the projects that increased our volumes and cash flow.

Establishing the new legacy positions that will provide long-term value growth.

And ensuring we have the capacity to maintain our commitment to dividend growth.

Both the business performance and the careful management of the cash cycle.

I hope that we have enabled you to share our confidence, that we're building on a robust foundation to meet our strategic goals.

Thanks very much for your attention.

We're now going to move into the Q&A session.

Thank you, sir.

As a reminder, if any participant would like to ask a question, please press the star, followed by the 1 on your telephone.

If you wish to cancel this request, please press the star, followed by the 2.

First question comes from Mr. Bruce Lanni.

Please state your company name followed by your question.

Bruce Lanni, A.G. Edwards.

One of the key questions I have is there any way you can kind of quantify what you mean by incremental acquisitions this year, that would be one area I'd like you to deal with and secondly if you could maybe guide us to what areas you're looking in to make acquisitions and then third, on your gearing already being down at 19%, maybe I missed something but how much lower would you like it to go?

Thank you, Bruce.

Let me give you the actual examples from this year, where the headline capital investment for the year goes from 12, a number you'll all be familiar with, to 14.

Now, of course half a billion of that is related to Sakhalin where it has the 100% number for the capital investment.

Now, we look at the other one and a half.

I'll break that down a bit and then ask Judy to comment.

First of all we had the opportunity to preempt on the Kashagan deal, when the British gas were selling their share, we were able to preempt sales with others and increase our share from 16% to a bit over 20%.

I think that was $400 million.

Then we look in our upstream business and we looked around the world and there were significant amounts of small, modest investments that we could do, that we'd previously been holding back that we felt now these were good, short, medium term opportunities that we wanted to go for.

Would you like to add to that Judy?

No.

I just -- just to clarify on the Sakhalin piece, as Phil mentioned there is a half a billion that is a minority interest which is not a cash expenditure for ourselves but the headline 14 billion in fact does include 100% of Sakhalin.

I don't know if that was clear.

Then you asked also a question about gearing?

Do you want to do the gearing one?

We have a gearing range of 20-30%.

That is the gross gearing ratio.

In periods like that where we have strong cash generation you would expect to be on the lower end of the range and as Phil said, about 19.

And we expect to stay on the conservative side of the range.

The other thing I think to keep in mind as we go through the back end of the year, is there are expenditures that are coming up be it Daya, be it the interim dividend, Daya and the interim dividend for example are an incremental dividend second half of the year, incremental expenses are up in the second half of the year versus the first and the long term obligations I mentioned will also come into the gearing ratio.

So you might see it come into the 20-30% range in the back half of the year.

Thank you Judy.

I hope that gives you a feeling Bruce for the mindset that we have as we're thinking about whether we do these incremental investments.

No, I think that's good but just as a follow-up just so I clearly understand it , of that 1.5, you went from 1.5 to 400 million.

That leaves with you about a billion.

Is part of that spread between new projects and acquisitions, is that the way I should interpret it?

There is probably about half a billion or more in these incremental short medium term upstream investments.

Okay, thank you very much.

Thank you, Bruce.

Shall we take the next question.

Next question comes from Paul Ting.

Please state your company name followed by your question.

Paul Ting of UBS.

Good afternoon.

Hello.

Now that your Saudi gas pick is finalized, I wonder if you could share with us couple things, first of all what kind of rate of return are we looking for expectation on the capital expenditure, and are you interested in expending your activity beyond the gas initiative you have already signed given the fact that they are seeking new investments over there?

Thank you, Paul.

Of course, the deal we ended up with came out of a much bigger, more complicated natural gas initiative.

And many of those things like the water projects, the electricity generation and other things, are going ahead on their own right.

The venture that we have ended up with, with Saudi Aramco and TOTAL which shell at the operator with 40%, is a huge exploration opportunity.

And it's pure frontier exploration. 200,000 square kilometers, about the size of England, and we'll be doing an exploration program over this next years, which as exploration programs are hopefully will lead to some success and investment in gas developments.

That's the deal that we're finalizing at the moment.

And of course, this will add to our existing investments in Saudi Arabia in the refinery, the Petrochemical complex that we are involved in, and the downstream lubricants investment.

That's the state of play for Shell in Saudi Arabia at the moment.

Does that answer your question?

Very helpful.

I was wondering if you could grapple with estimate of order of magnitude capital expenditure required or expected?

Well, it's a bit how long ask a piece of string because we'll do the exploration program which is modest amounts, you know, you measure that in tens hardly hundreds of millions of dollars.

How much you would be investing there after will depend on the size of the discoveries that we hopefully make.

Thank you very much, Phil.

Thank you Paul.

Next question please.

Next question is from Mr. Jonathan Wright.

Please state your company name followed by your question.

Jonathan Wright from CitiGroup.

Two questions please one on returns and one on capex.

Your normalized returns were depressed at 10%.

Looking at 2002 they were 12.5.

Does that imply that was sort of 8-9 cents in the first half.

Also will this they be depressed further by the accounting changes, the U.S.

GAAP accounting changes?

And the second question was on capex, it seems that you know we've got $14 billion this year.

That's a lot of additional projects you're pursuing in the Middle East.

Should we use $14 billion as a more normalized ongoing level?

Thank you Jon.

Let me tell you second one first.

It's a bit early to give any estimates of next year.

But I think what probably underlies your question is where are we on the question of capital discipline.

And from my point of view, nothing's changed.

We'll take a very tough approach to capital investment over the next years as we make our plans later this year.

Now, going back to the question on returns, it's good you've considered a question there on the normalized return.

Perhaps I can back up a little, and make a remark, and then I'd ask Judy to talk about the last part of your question, the impact that there can be on the measurement of normalized returns.

The remark is important.

It is the key measure of capital and efficiency in our business.

And in Shell we look at ROACE in two terms, first the reported ROACE latest number 17.4.

Our objective is to achieve a highly competitive ROACE relative to our peers in the industry and measured on a competitive basis.

That's very important to us and it's a headline number everybody sees it.

Now, normalized ROACE, this is what I need, running Shell, so that I -- I know that the headline ROACE is affected by the oil price margins all the rest of it and I need to look through that to how we're doing on an underlying basis.

And we need a ROACE for Shell which means that we can achieve our objective of cash neutrality at conservative conditions.

We talked about 13% when we were last making presentations to analysts on this subject.

I think what's more important is that we took a conscious decision knowing when we made those acquisitions in 2002 that normalized ROACE would go down.

But we decided what we'd do to make sure it came back up within a reasonable time.

First of all, we said we'd deliver the synergies associated with the acquisitions.

And that's a billion dollars pretax.

And as of today, we've already achieved $660 million ahead of schedule.

Secondly, we said we'd reduce our underlying unit costs.

Such that we'd achieve around $500 million a year before tax, over the three years, 2002, 2003, 2004.

We already did the 600 last year.

We're well on our way to achieving our target this year.

And we'll have the target for 2004 as well.

Then thirdly, we said we'd upgrade the portfolio to improve our returns.

And we talked about $2 billion a year, and we've already achieved 2.3 in the first half.

And as I said earlier, we've got another billion that's awaiting completion, and there's more to come.

And then we also, of course, had the Rohr Gas sale, a conscious decision to do something in that period when our returns were depressed to improve our performance.

And then fourthly, we need to turn round the U.S. downstream if we're going to achieve our targets.

And we've described that, how we're on track.

The reality is, though, we're only six months into a two-year program.

But overall, we're on track delivering those underlying improvements, such that we get our normalized ROACE back up.

Now, the last part of your question, you asked the question, well, are there things happening in how you describe or define your normalized ROACE.

Judy over to you.

Right.

Let me pick it up to you.

Just a reminder in how we calculate our ROACE .is on a four-quarter rolling average.

So what you'd be seeing in the change in ROACE. between the end of the year and the six months would be the impact of the first two quarters of this year and basically losing the first two quarters of last year.

So it would be a comparison.

The other thing to note is that we do use capital employed average point divided by 2.

So what you've seen in this first part of the year is the second half of the capital rolling in from deals like Enterprise.

And as you look forward, you're going to have another half of the capital from Daya and PQS coming in the back half of the year.

But as Phil said we're delivering on the underlying performance improvements, six months into a two-year program and those are going to continue working in the opposite direction.

Having said all of that there are two other impacts that you've already alluded to that I want to discuss a little bit further.

The first has to do with the exchange rate impact which we quantified as potentially about a point on the normalized ROACE..

You need to understand that a good portion of that is translation, the translation impact on the balance sheet, the strengthening euro which over the period has strengthened between ten and 11%.

That translation is non-cash in nature.

Also, we are going to have additional capital coming onto the balance sheet from the long term obligations we spoke about, and that will be perhaps another $4 billion coming on.

Again, something that's non-cash in nature.

You recall that our financial framework is based on cash neutrality at conservative conditions.

We're going to report ROACE. as it falls because frankly we're committed to the underlying transparency of our reporting.

However, we are also committed to delivering the underlying economic improvements we spoke about when we set these targets, and consequently, we aim to deliver the cash and economic equivalents of those targets, in due course in 2004.

Thank you, Judy.

Jonathan, I'm conscious we gave you a pretty long anxious to that.

That's all right.

Put your finger on some thing that rarely for us is in sense of mind.

Giving at the front of mind and something we're managing and keeping on top of continuous. .

Thank you.

Next question please.

Tyler Dann.

Please state your company name followed by your question.

Banc of America Securities.

Good morning Judy and Simon how are you.

Thanks.

My question, I think it's on a lot of people's minds in terms of a number of assertions you've made on the buy-back and the decision to not pursue that for the remainder of the year, and what I wanted to do was try to drill down a bit into the thinking behind some of the assumptions you're making.

If you could talk about the reference conditions, if you will, that you're forecasting, particularly as you're justifying the new investments in EP particularly.

And whether -- in other words, the free cash flow that may end up being forthcoming could be somewhat higher than you're forecasting and therefore you may have room, you know, either to pay down debt or buy back stock.

What would be the -- once you reach your gearing target I guess, what would be the decision then?

I think, Tyler, we have to separate two things.

You use the phrase forecast reference conditions.

And what -- yeah, I might say the forecasted conditions.

I understand what your reference conditions are.

My apologies for that.

No, that's okay.

For everybody that's listening, our reference conditions are intentionally pretty conservative, because the sort of investment decisions we make have payout times very often for the bigger projects seven, eight, ten year payout times.

So we have to be very careful that we don't bet the farm.

As far as conditions in the future are concerned, frankly, I can't give you an answer.

I wouldn't be so foolhardy.

We are looking out with a significant amount of uncertainty in the global conditions.

We have to be, I think, properly prudent, and that's why we want to strengthen the balance sheet.

Secondly, as far as screening criteria are concerned, in EP in the upstream, we look at a whole range of oil prices, anything from ten to $30 a barrel.

But as you know, our reference conditions are pretty tough in that respect.

Let me think -- sorry, go ahead.

So to clarify then, are you making your incremental capex decisions as a function of the current environment or at reference conditions?

We look at a whole range of possibilities, and we're pretty tough when we're making big investment decisions that we use a conservative outlook.

Hmm.

Am I clear?

Sort of.

Especially -- especially for big items.

If things got a payout time in the year, you may use something that's closer to the current conditions.

But if you're using and making the investment decision with the payout time of ten years, we are pretty conservative.

Okay.

I guess the gist of my question was, it seems as if there's a bit of a circular here.

But if you're using the current strong conditions to forecast what the short to medium term projects that you're going to be spending on, which --

Tyler, sorry.

I didn't say that.

I didn't say short to medium term.

I say normally we're using our tough conservative screening criteria.

Okay.

There are some exceptional circumstances when you get something with a short payout time and there I'm talking a year or two that you may be a bit more flexible.

Right.

And it -- yeah, okay.

I'll take it offline.

But I guess my main -- the last part with this, if you had a windfall, your gearing was at the low end of the 20-30% band and it happened quicker than you expected what would you do?

Okay but --

Carry on Judy.

It would be a nice problem to have.

Yeah, nice problem to have.

One of the things you have to keep in mind is that because you started this question talking about buy backs as well.

One of the things you have to keep in mind is we look at buy backs over a long period of time and as a way to manage our balance sheet.

And the current conditions are not going to impact that as much as it might in terms of some of our other alternatives.

So my guess is that the first thing we'd do is probably pay down some debt.

Okay, Tyler, thanks very much.

Next question please.

Next question Fred Leuffer, state your company name followed by your question.

Bear Stearns.

Good afternoon.

Hello Fred.

Two questions, I don't know if you got, maybe you gave the number of normalized ROACE for --

10%.

Second thing, just back to the share repurchases.

I guess it's a two part question here Phil.

The first is, what role does the stock price play in your decision, you're buying aggressively in the '50s now in the ’40s per share you're not buying.

And the second part of the question is, it appears to me, correct me if I'm wrong that you've abandoned your plan to return 50% more cash to shareholders.

Is that the correct interpretation or not?

Let me take the second one first Fred, and then I'd ask Judy to respond on, you know, the impact of the stock price.

Our promise, with regard to cash to shareholders, was that over the years 2001 to 2005, we'd on average each year return 50% more to shareholders than we did in the year 2000.

If you look at our performance to date, half-way, 50% of the way through that five years, we've, add 58%.

So we're ahead of schedule today.

And it's not that we've abandoned that.

That's something that we've talked about, and that's an aspiration that we have.

Now, Judy what about the impact of the stock price?

Right.

Well, as we've discussed, I mean, there's a hierarchy in terms of how we look at deploying our cash, starting with meeting commitments such as interest and dividend targets.

And then balance sheet management and investments with the buy-backs almost being a swing factor on the back of that.

Now, the other thing to keep in mind is that our buy-backs have a minimum level.

Once we start, for example, the minimum this year would have been 1.7 billion.

So we don't look at the program as an opportunistic one trying to pick stock prices.

But rather a longer-term tool in managing our balance sheet.

Thanks, Judy, thanks, Fred.

Next question, please.

The next question comes from Mr. Rod MacLean.

Credit Suisse First Boston.

I don't want to lever it too much more but I just think Judy talked about looking at the long term and thinking about share buy-back.

Just one or two points there.

Isn't there -- the point that people are trying to get to here isn't there an anomaly here, in the way of incremental investment opportunities versus buy-backs in the macro-environment as we're discussing here the promise made back in 2000 of a 50% increase in cash distribution was out to 2005.

That doesn't seem that far away, that sounds like a set of short to medium term buy back period and you're talking about short term period.

So the first question is isn't there afternoon anomaly now on $16 Brent actually driving some of these short term payouts on macro-conditions that are significantly higher than that, first question.

Second question, are you as a group skeptical of the benefits to shareholders value about share buy backs anyway.

And the third point totally different point on the U.S. downstream can you get to your 12% target for 2004 if you don't get the unplanned shut downs down to 4%?

Let me take the last one first.

Sorting out those unplanned shut-downs is critical to achieving that target.

And that's why it's getting very close attention, not the least from the chairman of the Shell Oil Company board in the U.S.A. which happens to be myself.

Taking them in reverse order, am I skeptical about buy-backs, I do personally see a difference between dividends and buy-backs, and that in my hierarchy, dividends is at the top of my list.

And we do that in our parent country currencies year in, year out, absolutely reliably.

And of course for our U.S. shareholders, I think it's worth an extra 15% this year.

And I see buy-backs then as part of the tool kit, the financial tool kit, in our financial framework.

Judy, what about the apparent anomaly.

Well, now, I think if there are value-creating opportunities, Rod, for us to reinvest in the business, we prefer that, and frankly we think you would prefer that as well.

Because that's what we do best is to invest in oil and gas projects.

And in terms of how we're looking at this, I don't think there is an anomaly because if you think about the projects that we are talking about, as Phil said, you know, one big piece of the incremental spending is in Kashagan, that is something long term in nature and we've looked at it on the long term horizon.

The rest are short to medium term yes they are medium term projects, that doesn't necessarily mean we've evaluated them on very high prices.

In fact Phil said we've looked at them over a range and evaluated them at our robust reference conditions.

Thanks Rod.

Thank you.

Next one please.

Next question comes from Douglas Terreson.

Please state your company name followed by your question.

Morgan Stanley.

First congratulations on your strategic progress.

Thank you.

Second internationally I just want to say if I can get some Clarification on some of the profit building trends in this basis in relation to 2002 second quarter specifically when you consider oil and gas production was similar to the year ago period and exploration expense was lower about $150 million and prices for oil and gas was higher.

It seems as even other quarters were strong, the profit should have been a little bit better in Q2 of '03.

So could you comment on whether or not there were any operating costs, taxation timing of lifting issues what have you that may have affected results and if so could you quantify some of those for us.

Thank you, Douglas.

This is a -- if you look at EP, between this quarter and the year ago, and late last year, there's a whole series of factors in there.

One of them, of course, is the arrival of the Athabasca oil sands project and its startup period, where you get a bunch of costs coming in.

The production is on ramp-up, we actually got up to nine plate capacity two days ago.

Okay.

155,000 barrels a day.

But you saw the ramp-up there.

You also saw some ramp-up in for instance the EA field in Nigeria.

But then Judy's got a couple of other items that may help to explain.

Yeah, Doug, I think the other thing to think about is we were talking about foreign exchange impact.

That did impact EP on the cost side, extent their costs were based in euros.

But that's another piece that sort of put upward pressure on costs in the first part of the year.

Okay.

Okay, Douglas.

Thank you.

Next question please.

Next question comes from Mr. Bert Van Ugenheus.

Please state your company name followed by your question.

Good afternoon.

Hello.

Two questions.

First on the Saudi Arabia deal.

Of course for the time being it is an exploration deal but I understand it also give you certain rights for production obviously.

Without asking you of course what sort of that ROACE commercial secrets but still what sort of format does the deal have?

Does it give you, can you enlighten us a little bit will it be a PSA or net back or what sort of formulas are there in the case you find actually gas there and secondly, could you fill us in a little bit about the re-branding in the U.S.?

I understand 2000 retail signs have re-bandage.

Do volumes actually hold up in the way as you suggested last autumn happened in the LA areas in other words do volumes stay stable on a smaller number of retail outlets?

Thank you, Burt.

On the first one for Saudi Arabia, the deal we have is, I would call it a perfectly straightforward commercial arrangement.

You'll forgive me if I don't go into details.

But in the event of success in the exploration phase, we would be entering projects that properly meet our screening criteria.

This is an economic decision.

On the re-branding, in the U.S., I've got a few statistics that I can use for you.

In fact, you'll find them on our web on page 19 of the document that we've sent out.

And that says that we've re-branded a bit over 2000 Texaco sites.

We're 30% complete there.

And we've upgraded 3400 Shell sites, that's about 42% of the program.

A number that's not there is, we've also closed down something over 1600 00 sites.

And then coming to your question on, do the volumes hold up?

We're seeing more and more examples like Los Angeles.

The short answer is yes, and it's very often 5%.

I think it's 5% on average.

Burt, there are number dynamics with regard to volumes.

The way to think about it is, we've been seeing a 5% uplift on through put on the re-branded stations.

But as Phil said there's a mix in terms of what's going on.

There are stations where we're shutting down, we have consciously planned in some as soon senses to lose that volume.

So what we're doing is focusing the network and making the sites that remain as productive in terms of through put as we can possibly make.

And that seems to be working very well for us.

Thank you Burt.

Next question please.

Next question comes from Mr. Neil Perry.

Please state your company name followed by your question.

Neil Perry from UBS.

This is a very good quarter in terms of the earnings and the cash flow and so I suppose that's the shock at the lack of buy back in the second half and you talked about capex a lot and dividends a lot.

Could you just reassure us that there's no change of strategy here and there's no move back towards the acquisition trail that you were on for the previous 18 months?

And then secondly, I wondered if Judy could talk a little bit more about where she would expect the normalized returns to bottom out?

You talked about more capital coming on, you're at 10%.

Where do you think you would go before you start marching up to 13%?

Thank you, Neil.

Let me give you absolute reassurance that capital discipline in Shell is alive and well and actually pretty vigorous.

Now, forgive me really if I take a little bit of exception to the expression, acquisition trail.

I mean, the reality was that the circumstances last year, the economic environment, our position, our strategy, all combined to bring along four focused strategic opportunities.

And we took them.

It was quite a heavy year.

You know, it would be nice if these things came along in a more orderly fashion.

But there it was.

And we had the opportunity to enhance our strategic position in the U.S. downstream dramatically, such that we now are the number one gasoline -- gasoline retailer.

We were able to buy Pennzoil Quacker State so that we're number 1 in passenger car motor oils in the U.S. with a 38% market share.

But perhaps more important we now have a global lubricants business that will be up, running and fully operational in the 1st of January, 2004.

And that's good business.

Daya, you know the story in Germany and how we were able to used those forced divestments, to use swaps rather than sales in order to strengthen our position particularly in Eastern Europe.

And Enterprise is turning out to be a very good deal which is delivered already something like 1.7 billion in cash since we made the purchase.

So those were special circumstances that arose.

We took our opportunities, and we're now delivering the synergies and whatever.

And we have to do so if we're going to get back to the sort of normalized returns that we like to have.

Judy the second part of the question.

Yes, just to go back to some of the dynamics Neil, I understand your question.

Clearly, the capital rolling in from PQS from Daya et cetera will have a depressive effect and the synergy delivery will work in the other direction.

In terms of bottoming out I think you need to think through the impacts of some of the accounting changes and the foreign exchange.

What we saw was a fairly large move down associated with foreign exchange in the first half of this year, and as I mentioned earlier a lot of that was non-cash in nature.

Now, we will have an impact in the second half of the year and ongoing depending on which way the currency moves.

So you know, I can't -- I can't call that turn for you per se.

Also, there are account -- these accounting changes have the promise to be quite distortive with regard to ROACE.

I mentioned the two that we know about now but clearly non-cash accounting issue roll onto the table be they things like expensing stock options which again has no real cash impact on your P&L but will have an impact on your ROACE.

And that's why what we have said in this call earlier is that we are very committed, totally committed to delivering the underlying performance improvements that we set out to accomplish when we made these acquisitions, and that what we're going to try to do is be as transparent as possible with regard to the reporting.

We're going to call the ROACE as it falls and it will have distortions from these things like foreign exchange or accounting changes.

But we are committed to delivering the economic and cash equivalents of what our original goal set out to do.

And in the end, or the bottom line, will be cash neutrality at conservative conditions as we move forward.

Correct.

Thanks Neil.

Thank you.

Next question, we've got time for perhaps three more.

Thank you.

The next question comes from Mr. Steve Pfeifer.

Merrill Lynch.

Two questions.

One I did want to follow up on the acquisition question when you purchased Enterprise, one of the justifications that you gave was that given the pricing at the time, that was accretive to earnings and so on, but under the reference conditions it was not.

And just going forward you have I guess changed the capital here a little bit with a little bit higher oil price at least in the near term.

Could you just talk about what kind of price deck you would use for acquisition?

If you use your referential that would is shut you out, but if you use the future strip you would be clearly competitive.

How are you looking at acquisitions and secondly if you could talk a little bit about reserve replacement where a little over half year and maybe talk about how reserve replacement is looking for 2003, ex acquisitions and divestments and I know Sakhalin is coming on and thanks.

Thanks Steve.

As a matter of fact we don't talk about reserve replacement any more than once a year, and we'll be doing that I guess in February time next year.

The only comment I would make is that of course, when you get events like the Sakhalin final investment decision or Kashagan when that comes there, these are important events even for a company our size they are lumpy developments.

On the acquisition side of things, you'll forgive me if I don't talk too much about our acquisition criteria.

But you can rest assured that when we even contemplate anything like that, we are just as tough-minded as we are with every other investment decision that we make in Shell.

You ought to be careful you don't go down that slippery slope.

Would you like to add, Judy?

That's fine.

Thanks Steve.

Next.

J. J. Traynor.

State your company name and question.

Deutsche Banc.

Couple of very quick questions.

You mentioned cash neutrality or being cash neutral in conservative conditions.

Can you confirm those are the same conditions as the ones you used to define your capital deploy targets.

Secondly in the U.S. oil products division, what was the return on capital employed in your reference conditions on Q2 or the first half, whichever you choose.

And the third one, there's been a lot of stuff in the news while I was about the Salin project in Russia, what's the status of that one?

Judy do you want to do the cash neutrality?

Yes.

The conservative conditions we're using are reference conditions at the moment J. J.

When you talk about 19 billion of cash generation that is 19 billion at 16 dollar oil prices?

Right.

Are you actually achieving that in the current mix?

The -- you know the goal was for 2004 so we have more to go in terms of our synergies.

But we're headed absolutely in the right direction on that.

So at $16 the business will generate $19 billion of operating cash?

Yeah.

On U.S.

OP --

I'm just looking at Simon.

To see whether we disclose that or not more than anything else.

In general we haven't disclosed it but it's in the low single figures.

We're still carrying a pretty poor fourth quarter on the 12-month running number.

You recall quite a significant loss in the fourth quarter and that will only work its way through the share, just look to the first six months clearly it's improving.

In Q2, where are we up to on the actual quarter?

J. J. marketing was above reference conditions and environment, the refining was a bit below.

On Salin we have had that license and opportunity for a long time along with Evicon.

There were some delays as we were trying along with other companies to have it under production sharing terms.

I think the way it's going, it could well be one of the first international oil company ventures that goes forward on the classic royalty tax arrangements in western Siberia.

There's some what I would terms little local difficulties at the moment, but nothing as far as I'm concerned to worry about.

Okay, J. J.

Thanks a lot.

Last question please.

Final question comes from Mr. Mark Gilman.

Please state your company name followed by your question.

Phil Judy good afternoon.

Hello Mark.

Two unrelated things.

First the exploratory expenses in the first half are down quite a bit from a year ago.

And I'm wondering if that is a reflection of success rate improving or whether exploratory capital is in fact lower.

Success rate is up.

And the exploratory capital?

To my recollection, not significantly different.

Okay.

Secondly I heard your comments about the improvements in U.S. oil products, and the time that it would take to achieve the reduction in unplanned down time.

Yes.

I was hoping however, you might have a reaction to the fact that over the course of the past 30, 60 days or so the picture seems to have deteriorated with just a number of unplanned incidents within the U.S. system and what specific actions you may be taking in that regard to accelerate if not enhance your confidence that this can be achieved?

There have been some disappointments in the last 30, 40 days.

I'm personally very disappointed and I'm personally visiting every refinery of Shell in the U.S.

I've been to three already, and I'm going to one next week.

And I'm going to two in September.

It is getting top attention.

I hope you get my drift, Mark.

I get your drift but I'm looking for measures.

Yes, yes.

This is a program that started about two and a half years ago.

It was always known to be a four to five-year program.

And we have to make sure that the progress we saw between last year and -- well, over the last 18 months or so, is really reinforced and continues.

And there's a whole detailed program to achieve that.

Can you indicate whether you believe Phil that the problems are asset or personnel oriented?

Both.

There's -- if you want to run a refinery efficiently you need to fix the kit, and also make sure that you've got the people processes in place to make it happen.

Now, of our refineries, the portfolio there, four are, today, running in first quartile.

There's no reason why all the others shouldn't as well.

Okay, thank you.

Thank you, Mark.

Thank you, everybody.

Really appreciated the time to give you a feel of how we look at things and how we're moving things forward.

Thanks very much.

This concludes today's conference call.

Thank you for participating.