殼牌 (SHEL) 2014 Q1 法說會逐字稿

Welcome to the Royal Dutch Shell Q1 results announcement call.

(Operator Instructions).

I would like to introduce your host, Mr. Simon Henry.

Many thanks.

Ladies and gentlemen, welcome to our first quarter results call.

Let me run you through the figures and some of the portfolio development before taking your questions.

And many thanks to the US joining early today.

We're not planning a time slot like this every quarter, please believe me.

First of all, the disclaimer statement, then on to our priorities.

Our long-term strategy is sound.

We're working towards a successful implementation of that strategy; and the financial framework is clear and it is consistent.

Our first quarter results reflect more robust levels of profitability.

However, as we saw in 2013, there is high volatility in the macro and high volatility in our own quarterly results.

So notwithstanding this, today's results, there is no complacency here.

The priorities we set out at the start of this year have not changed.

We are determined to improve our competitiveness and we will balance growth with better returns.

This means focusing on better financial performance on enhanced capital efficiency, which includes more selectivity in project choices and that increase in the asset sales program, and of course continuing strong project delivery.

We are repositioning the Company for changes in the industry landscape, particularly in oil products and the North American shale plate.

The impairments that we announced today in the downstream reflect our updated views on the outlook for refining margins where there are substantial pressures on the industry.

We are also taking hard choices across the portfolio, with some $4.5 billion of asset sales announced in the quarter.

That included Wheatstone LNG in Australia and downstream position exits from four countries.

Our investment strategy is delivering at the bottom line.

The first quarter has seen new profitable production from the deep-water Gulf, a ramp up in Iraq, together with the new LNG from the acquisition of Repsol's portfolio.

And we're maturing new options with front-end engineering and design, or feed decisions, on deep-water and in the LNG business.

And this is part of the project flow that will continue to drive further financial growth from us for many years to come.

And of course, the dividend increase we announced today for the first quarter, around 4% higher, that underscores our delivery in recent years, but also the future potential.

Turning to the results now, I'll start with the macro.

If you look at the picture compared with the first quarter of 2013, the Brent crude prices were some $4 per barrel lower, and we saw narrower differentials between Brent and the North American market.

Our liquids realizations declined from the first quarter last year, but we saw an increase in the gas realizations.

The North American winter was especially cold, with milder conditions year on year in Europe, and we saw that both in the gas pricing and the volumes.

On the downstream side, you might remember that a year ago, refining margins were boosted by a number of industry capacity outages and the aftermath of Hurricane Sandy in the United States.

This quarter, refining margins weakened in all regions, apart from an uptick on the Gulf Coast in the US, where the margins were lifted by the inventory draw-down and industry outages elsewhere.

And the chemicals margins declined in Europe, but also in the US, and that was due to weakening market conditions for intermediate products.

But we saw increases in Asia where the industry cracker margins did improve.

Turning now to the earnings.

Earnings for the quarter, including a $2.9 billion identified item, predominantly in downstream -- I'll say more about that in a moment -- but excluding those identified items, the underlying current cost of supply, or CCS earnings, were $7.3 billion for the quarter.

That's a 2% decrease in earnings per share from the first quarter of 2013.

A slight decline in downstream earnings; broadly flat in the upstream.

Return on the average capital employed on a reported basis all in was 6%.

That included the impairments in the quarter, of course.

But will be around 9%, excluding all identified items.

Cash flow generated from operations $14 billion, and that's an increase of 21% year on year.

Dividends, our main route to return cash to shareholders, and there we declared more than $11 billion of dividend in the last 12 months, and at the same time executed more than $5 billion of buybacks.

We have announced today the first quarter dividend will be $0.47 per share.

That's an increase of over 4% from a year ago.

The scrip dividend uptake for the fourth quarter interim was 47%, and we'll be offering the scrip again for the first quarter 2014 dividend.

I think you're all aware the scrip shares issued are the A plan.

Buybacks will continue as part of the policy to offset dilution from that program, subject of course to the share price and the balance sheet.

So far this year, we've purchased more than $1.2 billion of B shares, and due to the Dutch withholding tax rules, buybacks are currently limited to B shares for economic reasons.

The buyback did slow down recently due to the relatively high premium of Bs over As, and we don't want to issue low and buy high; and we are still continuing to work hard on solutions that give us the flexibility to buy back both A and B shares according to attractiveness.

So looking at the moving parts in the result, environmental factors, such as the brighter downstream margins, in aggregate a slight positive; some $300 million Q1 to Q1.

The security picture remains difficult in Nigeria, although it has improved from the very tough conditions a year ago where you might remember there were disruptions to the gas supply, to LNG, as well as the ongoing theft of crude oil.

We saw a slight reduction in earnings from lower volumes and cash and non-cash costs of about $500 million.

It's worth noting the last three quarters of last year saw the impact of a series of strong negatives in these choices of categories.

There was a $2 billion impact Q4 on Q4, for example, and that's bottoming out now in this quarter.

Looking at the integrated gas business, the upstream results included $3.3 billion of underlying earnings from this segment of the business, and that's LNG and GTL.

This was a record result for this piece of business and a 30% increase year over year, balancing growth and returns.

But let me be clear that there were some effects in this result that may not repeat, such as around $90 million of exchange rate gains, and $170 million of higher dividends from the Malaysian LNG venture, and that's both Q1 against Q1.

And we also saw a strong LNG trading environment.

That's quite normal in the first quarter.

However, over time, we are seeing the impact of a steady improvement in plant availability also.

This is also the first quarter where we consolidated the LNG portfolio that we acquired from Repsol at the end of 2013.

All of that helped drive the strong first quarter earnings and the cash flow shown on this slide and Repsol alone adding a few hundreds of millions to earnings and CFFO in the quarter.

We believe we are on track for the up to $1 billion per year cash generation potential from that acquisition, and that comes from both the [base off-take], and also the enhanced trading opportunities that we've achieved from combining the two portfolios, Shell and Repsol.

Integrated gas is profitable and it's growing, and we continue to be the leader amongst the IOCs in this business.

Overall, the upstream earnings on an underlying basis were $5.7 billion, pretty much the same as a year ago.

The earnings were supported by higher contributions from integrated gas, but also from trading, as well as higher gas realizations overall which offset the lower oil prices and the increased cost appreciation and exploration charges.

Now we've given you the split of the exploration charges on the chart here at top right, and I hope you find that useful.

You can see that in some quarters, the scale of the exploration activity in upstream Americas, for example, can dwarf the overall results there.

The Americas results sets were in profit compared with losses in the last several quarters.

This in part reflects higher Henry Hub gas prices and better associated gas trading results in the cold snap.

The volume effects were neutral on a Q1-to-Q1 basis in the Americas, and we're looking forward to a continued ramp up in the Gulf of Mexico later this year.

Oil and gas production overall for the quarter, 3.2 million barrels of oil equivalent today, and that's a headline decline of 9%.

That's a large movement, but the earnings impact Q1 to Q1 was negligible, with much of the reduction being in low-margin barrels.

This figure in total includes a 180,000 barrels oil equivalent today of negative impacts for license expiries, including Abu Dhabi; production-sharing contract effects; year-on-year difference in Nigerian security; and also, in the Netherlands, a gas production reduction related to the earthquake mitigation.

Excluding all of the above effects, the production volumes declined by around 4%.

Production was impacted by warm weather in Europe, and also by some 60,000 barrel oil equivalent per day of maintenance impacts and asset replacement dominated by South East Asia, the Canadian oil sands and the Gulf of Mexico.

Looking forward into the second quarter, LNG sales volumes are expected to be higher than a year ago, driven by the volumes from the acquisition.

The ADCO license in Abu Dhabi expired in January this year.

That will reduce our production by over 155,000 barrels a day going forward, but it is a low-margin contract.

In the upstream, we're expecting continued impacts from the Nigerian operating environment, but you may recall we had particularly difficult gas constraints in the second quarter last year, and we also saw the start of the blockade on the LNG plant itself.

Compared to last year, second quarter, we are expecting an offset from lower maintenance activities, and increased exploration costs and higher depreciation charges, all on Q-to-Q basis; a mixed bag of comparative movements.

We are working hard to improve our competitive position in the downstream.

This business has generated 7% underlying return on capital in the last 12 months.

We are driving here, as we stated in March, for $10 billion of cash generation a year, and 10% to 12% return on capital on a sustained through-cycle basis.

As we indicated earlier, we've reviewed the balance sheet values for the all products portfolio, and we've taken a $2.6 billion impairment charge to date.

This basically reflects an updated view on the industry landscape, in refining in particular.

Now we see continued pressure on margins from the growth of liquid-rich shale in North America, from a stronger demand growth for diesel products ahead of and compared with growth for gasoline, and continuing significant overbuild in refining capacity, especially in Asia and the Middle East.

Now the impairment today represents about 14% of the total PP&E fixed assets in refining.

We're continuing to refocus the downstream portfolio with divestments in non-core positions underway in four countries out of a total of some 70 countries; and, of course, further reviews underway.

Our earnings per quarter here were -- excluding identified items, were $1.6 billion, marked by slightly lower results in both oil products and chemicals.

The earnings were impacted by lower margins in refining and lower trading results, and year-ago oil product margins, they were supported by industry outages which led to positive refining and trading environment.

It was a relatively brief golden age.

These effects have, to a large extent, reversed out this year.

We also saw a positive Q to Q uplift for tax and exchange rates of some $200 million.

So overall, these are relatively resilient results from the downstream in quite a bit more difficult industry environment.

We did see some uplift to the earnings from lower levels of unplanned downtime and from higher retail and lubricants volumes.

And our Motiva joint venture on the Gulf Coast and the US was at a loss a year ago, and has returned to profit this quarter due to better industry margins on the Gulf Coast, but also improved operating performance.

Now looking back to the second quarter of 2014, we are expecting higher chemicals availability than second quarter last year, but lower refining availability due to planned maintenance.

Turning now to cash flow and the balance sheet.

Our business strategy aims to grow cash flow on a sustainable basis to finance competitive dividends and investment for future growth.

Cash flow for the quarter was $14 billion, the highest level for some years.

We've generated now $45 billion of cash inflows in the last 12 months, including some $2 billion of divestment.

Over the same period, the cash outflows for CapEx and acquisitions were $42 billion.

So that's with a further $12 billion on dividends and buybacks.

The final tranche of the acquisitions for Repsol's LNG portfolio of $2 billion was booked to capital investments in the first quarter of 2014.

Our gearing at the quarter-end sat at 15.6%, and that's a slight reduction from the position at the end of last year.

And if you look at the chart here on the left, the free cash flow position is improving.

$3 billion on a four quarters rolling basis, defining free cash flow here of cash generation from operations less the cash used in investing activities.

And that was $6 billion alone for the first quarter of 2014, comfortably paying for the dividend.

This does reflect the uptick in CFFO and the 2013 acquisitions beginning to roll out of the figures.

Now all of this underscores the strategy is delivering results, and it underpins the increase in the dividend that we announced today.

Turning now to competitive performance.

This chart shows the progression of the Company on some of the key financial metrics and where we sit versus the competition.

As we said at our recent management day, targets can be useful in some circumstances.

And we've taken the time out from precise outlook statements ourselves, and we think it's important instead to look at the competitive position of the Company.

Many of you have asked in recent meetings how you can measure our progress.

This chart shows the primary metrics to track our progress on growth.

That's both cash generation from ops and the free cash flow; and also on returns, the return on capital employed.

Our CFFO developments have been competitive in the sector, and this has been a major strategic objective to Shell in the last few years.

The free cash flow, so how we finance dividends over time, it has fallen recently as a result of more acquisitions, fewer divestments than 2013.

But many in our sector have also seen falling free cash flow.

On a first quarter 2014 basis, CFFO $14 billion, free cash flow $6 billion, improving trends.

These charts, of course, are a rolling 12-month performance.

On return on average capital employed, on the left, you can see reported returns all in; accounting basis local for all competitors.

This is the basis of long-term remuneration, and it includes all factors, such as impairments.

Whilst Shell's returns have been trending down here, again, this is common to the industry, but it's also important to look at returns excluding identified items where we look at the competitive picture; so we don't get to drive the wrong decisions or assessments by being driven by things like write-downs or asset sales.

On this cleaner basis, although the accounting differences still remain between the Americans and the Europeans, our return on capital is also low in the peer group, and we want to move nearer to the middle of this pack and be more competitive.

That's the aim.

And we're clear that positive progress on these three metrics, turning the trends in the right direction, is our primary medium-term financial objective.

This is how you should judge our performance.

Now let me update you on the portfolio activity.

Another busy quarter.

We've added new opportunities during the quarter, started up new production, and announced further asset sales.

All parts are positioning the Company for profitable future growth.

And you can see the details on this chart by strategic theme.

We've completed the Repsol acquisition.

We made new oil and gas discoveries in Asia Pacific.

We had new exploration acreage in Namibia, Norway and Russia.

And we entered feed on a series of new projects, particularly LNG in Canada, and the Appomatox deep-water hub in the Gulf of Mexico.

And we also took feed decision on the Peterhead carbon capture and storage project here in the UK.

Now these are some of the projects that could see some more substantial spending in the second half of this decade, after we reach final investment decision.

Divestments continue in the non-core portfolio, with some $4.5 billion of deals announced so far this year as we build up the asset sales to more typical levels, after a slower pace in 2013.

Integration of the acquisitions is going very well, and ramping up new productions, Gulf of Mexico, Iraq and Malaysia.

So just let me update you on two of those startups.

In Iraq, the Majnoon field, where Shell is the operator, 45%, that reached its first commercial production threshold of 175,000 barrels a day in the fourth quarter last year.

And it's been running at over 200,000 barrels a day in the first quarter, excluding curtailments.

Now Majnoon will only make a limited earnings contribution, but we do expect significant cash contribution from Majnoon from the second quarter 2014.

And in the Gulf of Mexico, production from Mars B began on February 3. It averaged 3,000 barrels of oil equivalent for the quarter, Shell's [share], and it's currently producing over 30,000 barrels of oil equivalent on 100% basis.

That's from two wells.

The Mars B ramp up progressing well then, and we should be at full production in a couple of years' time.

Now let me sum up.

Our first quarter 2014 results reflect a much more robust level of profitability.

However, it is an industry with high volatility, and the macro outlook does remain uncertain.

The priorities we set out [have] not changed.

We're driving to grow our cash flow and improve our returns.

This means delivering better financial performance, enhancing our capital efficiency, and continuing strong project delivery.

Our investment strategy is delivering at the bottom line.

The first quarter saw that new production, Gulf of Mexico, Iraq, new LNG from the acquisitions; all part of a much broader project flow that will continue to drive further financial improvement from Shell.

The divi increase today, that underscores our delivery, not just in recent years, but also the future potential.

We distributed more than $11 billion in the last months, completed $5.7 billion of share buybacks, all underlining the commitment to shareholder returns.

So with that, let's take your questions, please.

And could I ask you to restrict yourself to one or two each so that we can give everybody the opportunity?

Many thanks.

Operator?

Thanks.

(Operator Instructions).

Alejandro Demichelis, Exane.

Just one question, Simon.

In terms of the performance [upward] in the first quarter, maybe you can tell us how much you think of the improvement has come from some of the new initiatives.

Or should we expect the new initiatives to further improve this level of performance?

Thanks, Alejandro.

It's a good question.

There's no specific answer.

I'll step back a bit.

What we saw last year, I think we were very clear about in recent communications is that when you break down the portfolio and disaggregate, there are some very strong performing parts of the portfolio.

We saw integrated gas again today.

Deep-water has great potential as the growth comes through.

Not yet coming through, just to be clear, but the projects are pretty much on track to do so.

The mature upstream performs well.

So there were a couple of areas where we were very clear we know we need to do better, improving returns in the first instance, and creating a growth platform, at least in the shale; potentially in parts of the downstream as well.

So it was downstream and it was the unconventional resources.

We also plan to deliver slightly lower exploration expenses by drilling slightly more successful exploration wells.

Now we've seen on the latter a better performance than in earnings contribution from the exploration, back more to a trend level.

So [all] products, on both ore products and shale, these are long-term improvement programs.

So, yes, there is some improvement, but we're only at the beginning of much longer journeys.

Downstream overall, in fact, had a much more robust underlying performance this quarter than it did a year ago, even though the results were down, because actually the refining margins were much more attractive a year ago.

What we have seen progressively over the last three years, really since (inaudible) over the downstream, some of the changes he made then on the -- both the organization, the way we look to manage the fuels value chain.

Some of those are coming through in a more what we believe a sustainable way, but we are a very long way from declaring victory because this needs a lot of people to do the right thing across the globe on a daily basis.

So quite a bit more to come; still several years to deliver there in the downstream.

But encouraging signs, and not just in the first quarter.

It's really been now six to nine months of more robust underlying performance.

On the shale, the same is true, only in terms of the bottom line definite improvement there from the gas pricing; over $5 in the quarter.

We have really focused the drilling only on the liquids, still mainly in the exploration and reappraisal activity, so we're not yet ramping up our activity on the development.

Therefore, volumes are actually down about 30,000 barrels year on year, mostly gas, and we are seeing cost coming down from some of the changes that Marvin has been making.

So we have solid progress on the things we need to do, but actually not that much contribution so far.

I think by in large, the answer to the underlying question of what's made the difference in the first quarter, how sustainable is it, well, actually, the portfolio is pretty strong overall anyway.

We showed that when we deconstructed the portfolio.

And sometimes, you need also (inaudible) [firing].

I think most of them were in this quarter.

At the back end of last year, unfortunately, that was not the case.

This is not a portfolio that is in disaster or crisis.

It does need to work better in some places though.

So thank you for the question.

That was great.

Thank you.

Irene Himona, SocGen.

I have two quick questions; firstly downstream.

You wrote off 14% of the value of European and Asian refineries.

Can you say how the process works?

Are you still reviewing the US side and is that to follow?

And my second question on the cash flow in Q1.

Excluding working capital, it increased about $1.58 billion, and that exactly corresponds to the $1.58 billion decline in the cash paid tax in the quarter which was substantially below the P&L charge.

And that wasn't the case in previous quarters.

Can you say whether cash taxes will catch up over the rest of the year?

Thank you.

Thanks, Irene.

The process in a nutshell; we spent quite some time, rather longer than we had originally intended, reviewing the impact of those secular trends on our future projections for refining margins, both at the global, regional and individual asset level.

The reason it's taken time is that the trends are quite significant; fundamentally Mogas versus diesel demand; the emergence of significant liquids from the Shell plays in North America which are both light but also feeding with some price disconnects to the US refining system.

And then finally, the fact that I'm afraid the Middle East and Asian countries continue to build massive refineries with highly competitive low cost and damaging returns for everybody.

So all of those three things are playing out over time, and there are quite some different ways depending on how competitors react, e.g., closing refineries or changing their positioning in the value chain.

So we looked globally, regionally and at every single asset.

So we've looked at the US, we've look at EU, we've looked at Asia.

We play out in different scenarios.

We compare the potential future asset value and net present value terms against the book value.

And this is the end result.

It's as good as we can do at this current point in time.

It is what -- I just remind you.

Effectively, total asset base in refining is less than $20 billion before this write-down, and that is clearly less than 10% of the capital employed in the Group.

So it's important but not massive in Group terms.

I cannot say where we go going forward, because all of the facts I talk about, they do continue to evolve over time.

There is no direct linkage between impairments and portfolio actions, although clearly, the economic analysis does have some bearing on that decision process.

Cash flow in the first quarter, it's always challenging to look at only three months cash flow.

Partly for the reasons you state, we do include the tax payment.

Q1 is always a low tax payment year.

Last year, we didn't make much profit; so by definition this year, we will pay less tax than we did in the previous year.

Having said that, I can't make a forecast on three-monthly basis going forward, but just remember Q2 and Q4 are both higher tax payment quarters; Q1, Q3 usually lower tax payments.

The important number for us is the 12-month rolling with the uptick that you see there to $43 billion.

And just the point on working cap overall, $8 billion over the last nine quarters while the oil price hasn't really moved is no accident.

That is much better management of inventory levels and underlying working capital.

So that reflects some of the genuine structural improvements in the way we do business, particularly in the downstream; and I certainly don't include it from cash flow management and planning when looking at the financial framework.

Thank you.

Theepan Jothilingam, Nomura.

Two questions, please.

Firstly, just on Arrow LNG, I think you -- in one of the slides you talked about divestment or project reframing.

So I was just -- if you could give an update there whether you're considering perhaps using some of that gas as third party into other CBM projects?

And then the second question is, could you just give an update also on where you are on the pet chems project in the US, please?

Thanks, Theepan.

Arrow LNG, we frame it, or describe it as reframing our divestment.

We've been looking for opportunities to monetize the asset in a way that is less capital intensive than building a fourth LNG plant, which is the best way to state that, which means potentially talking with all the other players in the region about how we get our gas to market in the best way.

We're currently working potentially with all three as to what is the best way to monetize.

The real priority is a reframing of the development concept more than it is a divestment, but I can't say further than that.

There clearly are opportunities to contribute our molecules to other peoples' infrastructure in a way that is mutually beneficial.

Chemicals in the United States, this really I think is a question about potential investment in Pennsylvania based on ethane source from the Marcellus field.

It is a -- it remains a potential project.

We are doing some front-end engineering and design work, but it is not yet a final investment decision.

There is still quite a bit of work to do to ensure first of all the cost, and then secondly that the margins -- at both ends, the sales revenues and the cost of the ethane are sufficient to support over a 20-year plus lifecycle to support an investment up front.

That would be a non-trivial investment, multi billion dollars, if we are to go ahead.

So it's quite well advanced, but we're still some way from the final decision.

Do you think that's an event for this year, or does that roll into 2015?

Difficult to say, Theepan.

Let's look at it this way.

There's a variety of chemical opportunities open to us around the world, some of which are fairly clear.

So [Qatar] is one of them using ethane out of the gas liquid plant.

Obviously, Iraq.

As we develop the gas projects in -- or project in Iraq, there is also a potential supply there in Iraq.

We have ongoing potential in parts of Asia and Singapore; and in the Nanhai complex in China.

We can't do all of that at the same time, clearly, but we are -- it's an attractive overall set of options to develop growth in the downstream business.

So we'll say thank you, Theepan.

Lydia Rainforth, Barclays.

A couple of questions, if I could.

The first one was just a very basic one on Cardamom and when you're expecting the startup for that one.

And then the second one was on just something that you were quoted for saying on Bloomberg earlier about BG having some attractive assets.

Could you just remind us what your criteria for acquisitions is at this stage within the restructuring of Shell?

Thank you.

Thanks, Lydia.

Cardamom is 100% -- relatively small, but up to 50,000 barrels a day tied back in the Gulf of Mexico to the Auger platform.

The work is all done on the platform.

We're drilling the wells.

We look to hook up and ramp up production.

There won't be a -- it will be the second half when it comes on, and depending on the pace of the ramp up, which if it follows [Groundbirch] would be good, but there may not be a material contribution in 2014; it will contribute more significantly to 2015.

Acquisition of assets.

Interesting question bearing in mind it's only three months ago since most of the questions were in the opposite direction.

So perhaps we haven't had enough discussion recently about the criteria internally.

The criteria for acquisitions are the same as they are for organic investment.

We look at a range of economic outcomes, but also the sensitivities and risks, and the strategic fit in particular, across price range [$70 million] to [$110 million].

We expect obviously positive NPV.

We may -- depends on the asset; we vary hurdle rates anyway, even for organic, in the sense that certain assets provide infrastructure around which it will develop for many years.

They may track a lower hurdle rate than incremental assets that are adding to existing pieces of infrastructure.

Same applies to M&A work.

But more generally, we are always interested in assets; difficult to get too interested in companies, partly because the price tends to be too high, and partly because you end up paying the premium for assets that are not a good strategic fit.

And I've no reason to change that general statement today.

Thanks for the question, Lydia.

Thank you.

Next question.

Fred Lucas, JPMorgan.

A couple of questions.

If prices hold at current levels, Simon, when do you anticipate Pearl will transition from cost recovery to profit sharing?

And my second question.

I note in the statement that a couple of hundred million dollars from the sale of your Mississippi line to Tapstone Energy.

Is that right?

So a couple of hundred million dollars for the entire 600,000 acre position that you had; around $300 an acre.

Is that correct?

The second point is correct.

Pearl, I have to say remains confidential for obvious reasons.

However, if you track back to previous charts from three or four years ago which gave an outlook at $70, you have to subtract a couple of years almost by definition from the point at which you reach cost recovery.

It's doing extraordinarily well at the moment.

The same chart will note that you also don't see a massive step down in returns at the first point of full cost recovery, so it will retain and remain a very strong return and cash generator for many years to come.

Much appreciate it's confidential, but given how much higher prices have been versus that $70 reference, do you think it transits 2015, or is it later, 2016?

I can't really say, Fred, and I'm not sure it makes too much difference to the ultimate outcome, particularly at $110, because there's a significant amount of profit oil in there for us.

Okay.

Thank you.

Thanks.

Thomas Adolff, Credit Suisse.

I have two questions, please; just one on Motiva.

You said there's been an improvement in the performance.

My question I guess is how profitable is the JV now versus where you want to be?

And have you seen the uplift from using different feed stocks already in the first quarter, or do you see significant more upside from this?

I guess the second question is on asset disposal.

Everyone is looking to sell assets.

It's a buyer's market.

Asset quality aside, for assets that may be considered for sale or partial sale, how important is the partnership with Shell that could be offered to any partial asset monetization?

Thank you.

Thanks, Thomas.

I'll have to think about the second question.

Motiva, the improvement in performance really is all cylinders.

We are -- better operational performance, particularly in Port Arthur.

That enables us to be both more selective about the crude and more able to maximize the flow of the molecules into and out of the refining network.

We have bought cheaper crudes there and we are maximizing the effective market in short that Motiva have embedded.

So, actually, the last six months has been back in profit.

Is it profitable enough?

Probably not yet, no.

But it is cash positive and we'd expect to see some cash return this year ahead of earlier expectations.

The crude flexibility, yes, we're doing quite a bit of that, but not as much as we would like.

And this essentially a logistic constraint.

You physically have to get the crude to the refineries, particularly in both Norco and in Port Arthur.

So there is more to come, but there needs to be effectively better access to the pipelines and to some of the cheaper crudes that we need to get down to the Gulf Coast.

A buyers' market on the sales; it's -- first of all, while that may be true in general, it's not necessarily true specifically for the assets that we have been selling; for example, the Australian downstream, the Nigerian onshore assets.

They have been quite significantly competitive, let's put it that way.

They've been -- good prices achieved.

When it comes to partial dilution, where we are talking about strategic partners such as our Chinese or Russian or Qatari friends, I think it's quite important that Shell's ability to operate and the operational skills and capabilities that they were to bring as well, they're very, very important too.

So where we dilute down, that is a preference for us to do it with somebody where we have a much broader strategic relationship and there is a higher level of trust and understanding of each other.

It's very difficult to say if you end up just purely cash or economic driven transactions how much value a buyer would associate with a Shell operated asset.

I would like to think quite significant.

But our real strategic priority and preference is to work with, for example, the Chinese, Russians, Qataris, Saudis, Brazilians, with whom we have quite a good working relationship already.

Okay.

Perfect.

Thank you very much.

Martijn Rats, Morgan Stanley.

Simon, I wanted to ask you two things.

The North Sea has seen a lot of maintenance last year, and it sounds like maintenance overall is coming down a little bit.

Also, looking at the 20-F, the North Sea performance appeared reasonably weak last year, and I'm just wondering if we could perhaps be at a bit of a turning point for the North Sea.

If you could comment on that.

And secondly, I wanted to ask you, slightly taking away from the quarter per se, but if you look at all the annual reports that have been published lately, finding and development cost is continuing to trend upwards.

And at the same time, there seems to be much more focus on capital discipline in Shell and elsewhere.

I was wondering if you had any view on where this relentless rise in F&D cost could go.

Are we at a turning point for that one too?

Or will this likely continue?

If you have a view on that, that'd be much appreciated.

Many thanks, Martijn.

You may be doing more study than I do on these, but I'll try and give the questions justice.

The North Sea maintenance, it wasn't just maintenance last year.

It's general unreliability, or unpredictability, or difficulty bringing assets back on-stream.

We were below 50% availability relative to 100% capacity last year.

Just -- the industry only did 60%, and that's quite a good reflection of the challenges of operating in difficult environments with mature assets and obviously very high operational standards that we all need to meet.

There has been a little bit of a turning point.

We're -- I think we're above 50% in the first quarter, but it's hard work, and so there's not a major additional contribution yet.

We would hope that we will see continuing improvement quarter by quarter during this year, but we certainly look forward to the big new projects, Clair, Schiehallion, coming on stream in the not too distant future.

They're both BP-operated, so I can't give any further details, but they look good projects, and they will help the overall performance out of the North Sea.

The next question; annual reports, trend upwards, unit finding and development costs.

I can honestly tell you I really don't look at this as a number it being an outcome from choices that we make and decisions quite often taken many years ago; and it reflects so many factors that we don't manage directly.

It's not that helpful, even as a long-term trend.

And the reason I think is pretty obvious in our own results.

We're 9% down in production volumes for the same income year on year with pretty much the same oil price.

So value, volume, make your own statements on it, but we pay the dividend with dollars, not with barrels.

Unit finding and development cost is also primarily relevant to what is your revenue per barrel.

So if we keep bringing on Gulf of Mexico barrels to replace much lower-margin barrels elsewhere, then I don't mind paying a higher finding and development cost.

It's not necessarily a reflection of inflation.

It can be a reflection of deliberate strategic choices, which I think in our case it is.

And last point.

I mentioned Iraq, obviously Repsol.

Quite a lot of the costs associated with these activities get reflected in certain ratios, but again, no volumes.

It's all revenue or value but no volume.

So rather less of an indicator going forward; so I'm relatively relaxed on where it goes as long as the projects are delivering as expected.

Thanks, Martijn.

All right.

Thanks.

Next question.

Iain Reid, Bank of Montreal.

A couple of questions, please; firstly on your North American shales, etc.

Having taken this big write-down in the downstream, is there the intention to have a look again at your North American shale position and perhaps go for the same exercise?

Particularly given the fact that you're selling some of these assets at what look like rock-bottom prices?

And secondly on the scrip.

I know you've answered this question before, but you talked about -- and the buyback, actually.

You talked about the B share trading at a premium to the A share of 7%.

It's been stubbornly at 7% now for some months and you're scaling back on the buyback because of that.

It doesn't look like that's going to change any time soon, and you've talked about the problems with the Dutch tax authorities.

So isn't it perhaps time to give up on the scrip and solve your problem that way?

Thanks, Iain.

On the first question, on the US shale, yes, we will look again.

We're looking continuously, I think it's fair to say.

But what we gave quite some granularity on I think in March is the different elements.

We still have $24 billion/$25 billion on the balance sheet for shale.

We're reducing that actual ongoing investment while we evaluate certain of those basins further.

About two-thirds of that value were then the Marcellus and the Groundbirch, both gas assets, one in Canada, one in the US.

What we'd said before was the liquids assets, the remaining liquids assets, by and large they look okay; obviously still to be proven when we develop.

Appalachia and Groundbirch, it will depend on the pace of development; and also, in the case of Marcellus, the quality of the asset, we're still appraising that.

The West Canada gas is a great resource.

It is targeted at the LNG Canada project.

Having said that, perversely, the choice to go forward with that project, mainly to lower investment if we reserve the molecules for LNG, which may actually trigger an impairment over time because we'll be investing less in the short term.

Those are the rules.

So we'll see how we go with that as we go forward.

And that -- it's not -- I wouldn't rule out any further impairments as we are still in the appraisal phase on the rest of the portfolio.

I think it's fairly clearly flagged in the QRA as well.

The scrip buyback, your comments are noted, Iain.

Thank you.

(laughter) Okay.

Thanks a lot.

Jason Kenney, Santander.

Two questions, if I may.

If I were to add the fourth quarter results and the one quarter results together to get an average of $5.1 billion, is that a good underlying estimate for average quarterly trend levels on a medium-term basis?

Or do you think there will be headroom over that in a one to two-year timeframe under a similar oil macro condition?

And then the second question is a bit challenging, I suppose is just when is a material difference a material difference worth flagging to investors and analysts?

Because in January, you pre-announced due to a 40% difference for actual results versus consensus, and today, you've got a 44% [peak to] versus market estimates but no pre-results comment; and still very limited guidance from your Investor Relations.

I am wondering how credible your guidance in quarterly statements is one month into each period when you've got a three-month period to talk about.

I know you've commented on some of the two-quarter, second quarter operational trends, but how can you justify not putting in play at least full-period trading indicators like many of your peer group after the end of each quarter?

Thanks, Jason, and I understand some of the frustration there might be out there in terms of modeling and estimates.

Almost by definition, the $5.1 billion average is precisely what you state; it is a good average of the underlying performance.

However, more importantly, we need to improve returns and we will grow.

That's the strategy.

Therefore, it ought to do better over time if we deliver the new projects, if we deliver the improvements in the oil products business, and if we continue to apply the activities across the shale portfolio, including the upgrading the portfolio work.

So those are the drivers of future performance.

We expect growth and we expect better return, so it should improve.

Earnings, of course, comes with it.

The next question is probably not quite so easy to answer.

Yes, interestingly, we did have some discussion, but one clear point first; it's not the difference between earnings and estimates that will drive any decision on disclosure, because that, I'm sorry, guys, will give too much [credence] to the estimates.

And the reason that -- the underlying rationale for announcing early in January was twofold.

One, it was a break from trend, and not just a quarterly trend, it was a 12-month rolling trend.

Because we have been at the $5 billion to $6 billion quarter trend.

We've had good quarters, bad quarters, but not three consecutive quarters as we did at the back end of last year that were below that trend.

That was the primary driver.

The secondary driver was we work in a regulatory environment which is particularly, should we say, intense at the moment.

There are regulators out there looking literally for a few headlines, and we are not going to put our name in them.

And the -- we do -- you talked about very limited guidance from our investor relations team.

I hope that's actually no guidance from the investor relations team, because that basically is pretty much what the regulators expect.

And stepping over that line is not something I'm prepared to do.

And you'd have to pick that one up with the regulators if you want more help.

How credible is the pre-existing guidance?

Well, clearly, it can only be as good as it can be at this point in the quarter.

I do not know what will happen.

Stuff does happen in our industry; you know that well.

Nigeria is an evergreen, but also turnarounds can take longer, startups can -- it can be better.

Who knows?

But we aim to make announcements through press release or otherwise for anything that genuinely is material.

A trading statement, well, most people's trading statements just tell you what margins were and prices were, so you can apply their trading statements to our performance at the end of the day, but I'm not sure that would actually help.

There are always quite a few one-off factors in any result.

I mentioned [the IE] and the timing of dividends, the difference in exchange, timing of dividend payments.

It does happen.

And absent actually releasing the earnings on a monthly basis, it's very difficult to help you out while we have a portfolio subject to such a wide range of external factors.

So the most important thing is to look at the longer-term trends.

We're showing you the 12-month trend.

That's the operational performance that we hold people accountable to.

We need to pick up and show all of the big trends that I showed you moving in the right direction.

But equally important is the three to five-year trends where we have to make the better returns, the growth sustainably through cycle targets that form the basis of both the strategy and the financial framework.

So, sorry, there's not a lot more I can do in the current regulatory environment for the three-month period.

Yes.

But, Simon, you do come on quarter after quarter saying that you've got to look at the longer-term trends and not the shorter term trends, and then today you're saying that over the last nine months, you've got an $8 billion shift in working capital, and that's just --

Nine quarters, actually.

That is the last 2.25 years, not months.

That's due to better management.

This should have been in place three or four years ago.

It was -- to talk about things on a shorter-term basis and then tell us actually we've got to look at longer-term trends for quarterly results, it just seems a bit indifferent.

Well, yes and no, and I do appreciate it.

I'm tempted to offer you a quote because this is how it feels sometimes and this is why you must look longer.

But if you want to be an executive in this industry, if you meet with triumph and disaster and treat those imposters the same, then you have to do that.

It is not a disaster in Q4; it is not a triumph in Q1.

The long-term trends are beginning to move in our favor.

But that does reflect long-term strategic intent.

And, yes, you can go back three or four years and say we should have been in a different position.

Well, we weren't.

But that is good.

And it's good in the sense that some of the improvements that we are making come for free.

We don't have to invest to improve working capital or some of the improvements I talked about earlier in the downstream.

And you'll see those delivered quarter by quarter in the success case.

Okay.

Much appreciated.

Thanks, Jason.

Good discussion, by the way.

Jon Rigby, UBS.

Sorry.

I was just still taken aback by hearing Rudyard Kipling quoted on an oil and gas call.

Can I ask two questions, one of which actually is related to Jason's question?

If we had looked at Q1 last year, I think we could have got over excited and then got horribly disappointed by Q2, Q3 and Q4.

Can you just maybe go back through again, and it's a question I've asked a number of times around various trends that impact single quarters?

Are there things that we should be aware of that continue to affect Shell quarters that are positive in 1Q and perhaps 3Q, but less positive in 2Q and 4Q?

And were those accentuated last year and won't recur this year?

Or is likely to be underlying at a similar trend?

Just so that we can start to consider where we are in your improvement; I take your point about looking at the long term.

Just one other question.

Just on Nigeria, I know you're in the process of making some on-shore disposals, when you come to look at that, are you looking purely at the consideration being offered, or are you also having to be aware of your legacy responsibility for those assets moving forward?

Even though that you're not obviously the owner, you bear some sort of residual responsibility potentially.

Thanks.

That's a good point, Jon, that how can we help you better with this.

And one thing is to say, is it a seasonal business; some things like tax payments; but also the gas business, the volume, the demand is clearly higher in the winter in some parts of the world.

And we do have quite a few other underlying issues; like some of the difference in exchange now is coming through from -- like the Australian to US dollar on a quarterly basis is a $100 million to $200 million variance, which is becoming more predictable for us and maybe we can help out there a little bit.

But fundamentally, things like timing of dividend payments, sometimes we're not in control of that.

So there's a limit to what we can do.

But I think year-on-year quarters is an easier comparison than consecutive quarters for that seasonality reason, and I think we should try and take that into account to help you.

Sorry.

The second question, could you just repeat that?

Nigeria disposals.

I was just wondering, because it looks to me that there's been quite a lot of bidders, but I guess that not all bidders are the same.

Right?

There have been quite of lot of bidders.

We have over 20 serious bidding; mostly consortium with a Nigerian operator, often with overseas financial or operational backing.

And there are some good players in there who could do a good job with the assets.

I think we could come to a commercial agreement.

What is slightly more challenging and slightly more difficult to predict is how we can actually get the overall approvals across the whole of the stakeholder environment, including the government, because in previous transactions, that has taken some time; up to a year maybe.

We're also heading into an election in about a year's time, and that can have an impact as well.

So difficult to predict outcomes, but there are certainly some good players out there.

Now when it comes to the ongoing liabilities, the reputational liability I think is impossible to divest.

Clearly, the terms of the sale aims to establish base lines against which we carry no further liability if there are environmental or other issues after the point of sale.

Can that then hold up in the future?

It remains to be seen.

It will always be difficult to detach the Shell name from some of the activities in the Delta, and we have eyes open on this, but the legal protection will be solid, and it is agreed and signed off as part of the deal.

So that's about as good as we can get.

And if you're such a student of literature, Jon, you might try the next two lines of the poem as well.

But I won't quote them.

Thanks.

Thanks.

Take the next question, please.

Michele della Vigna, Goldman Sachs.

One thing I wanted to ask about is the integrated gas division.

So you had record results today, up $800 million year on year.

And yet from the management day you had about a month ago, it looks like that is a division that you forecast to be down in terms of cash and returns by 2015/2016.

Could you give us the moving parts there?

Because it does actually seem from this quarter to be on an upward trajectory.

Many thanks.

It's a good point.

The reason we're showing returns down a bit is by 2015/2016, we're still continuing to invest in Gorgon and Prelude and it won't have had much of an uptick.

Well, it won't have had any uptick in earnings in the early part of that period.

So basically, the capital employed continues to grow there.

We also have license expiry.

So effectively, it's a small movement down that was projected forwards, so there's a license expiry in Malaysia that we're not projecting to get extended.

Beyond 2015/2016, Gorgon, Prelude will make very significant contributions.

So will Elba Island.

But hopefully, we will continue to invest in new projects such as Canada or Browse.

So the basic point around the integrated gas positioning in the March presentation was that it is already highly profitable.

It is already growing, and has grown fourfold in the past five years or so, and will continue to do so.

It will be the core of Shell in the future.

And that basically is the message to take away.

It may go up or down a little bit each year, but it will be very a very substantial part of the Shell Group for decades to come.

And, Simon, sorry, if I may come back to that license expiry in Malaysia.

Could you quantify, in case it doesn't get renewed, when the impact would come and how much it really would be?

It's next year.

It's not that material in the big picture, but it would move us backwards, while we're investing heavily in Australia ahead of production as well.

So it just moves us backwards.

I'm told it's in the 20-F as well.

So it's an important contributor, but going forward, there are bigger ones that will come on in to replace it, such as Gorgon, Prelude.

Understood.

Thank you.

Thanks.

Lucas Herrmann, Deutsche Bank.

I have to say, actually, reading back on your comments at Q1 in terms of the outlook, it's encouraging that you seem as poor at forecasting the quarter as we've evidently been, though don't for one moment take that as a comment that I'd like you to withdraw the commentary that you do give us to start with.

Staying on the theme, I wondered if you could -- is there any way you can bridge Q4 into Q1, and in particular in the upstream?

You very kindly bridged Q1 on Q1.

I struggled evidently to understand quite why your numbers were as poor as they were last year, and I'm not sure that I've ever really understood.

But perhaps it's easier for your to tell us how it is that in the upstream you delivered something like $2.5 billion in Q4 2013 relative to the $5.7 billion in Q1 of this year.

Clearly, I can see $700 million depreciation.

I can assume $300 million from Repsol.

I can take $300 million from gas prices.

But I'm still $2 billion out.

And the production numbers are essentially the same.

I know not all barrels are equal.

First of all, we were accurate in the operational statements we made, Lucas.

It's you who derived the forecasting from them.

No.

I'll just remind you, Simon.

You say now -- you made negative comments, and you said now I say that all against the fact that I delivered -- that I think we delivered over $7 billion of earnings a year ago in the first quarter.

I take that as an intimation that first quarter in 2013 was actually very good.

But it's an observation; and you're right, it's interpretation as well.

Yes.

A couple of other bridges for you; $500 million or so of exploration, which actually was much -- was basically no tax shield in the fourth quarter.

It's still relatively high in the first quarter compared to a year ago.

The other bridge -- and this is a seasonal factor so don't take this the wrong way, but the trading activity in the first quarter is always higher than the fourth.

This is because March is more volatile which may be because traders themselves are more active.

In neither quarter was there a particularly big difference from expectations.

In fact, this quarter in 2014, certainly in all products, was lower than it was a year ago; but it was certainly better than it was in Q4.

(Multiple speakers) the case was it particularly unexpected.

But there is that element of seasonality.

We seem to -- the first quarter is always a good one.

I'm not sure if they go down the pub for the entire fourth quarter, but -- and I mean the industry as a whole there.

It's just there is less trading opportunity in the fourth quarter, typically.

How big can that delta be?

It can be several hundred million dollars if you go quarter on -- for Q4 versus Q1, several hundred million dollars.

There was a particularly attractive gas trading environment in both Europe and particularly North America in this year; much more volatility, basically.

So more opportunity to work that market compared to a year ago.

So the gas trading was up year on year; the oil trading was down year on year.

Both of them were much better than Q4.

So they were both things that helped.

And then basically the fact that there's less tax yield, or almost no tax yield on the exploration expenses in Q4, which I did -- I think we did flag at the time.

So basically, exploration expenses is quite a big contributor.

Depreciation is one that does come through and takes quite a bit of an understanding, even by us.

I'll grant you that one.

But there were some changes on the discount rate around the decommissioning and restoration, so some effect.

But that was more negative this year than it was last year.

And the changes in unit DD&A that you see as a result of proved reserve additions at the end of 2013, all of which came out as we expected, but maybe we don't actually guide in the level of detail that would help you.

But what you see now is more representative going forwards, but the guys in IR can help you with that one, hopefully.

It's not additional disclosure.

And just one follow-on from that.

If I go back to your fabulous comet charts at the strategy day where I guess the intimation was 2015 to 2016 the Company should be capable of delivering broadly $50 billion or so of operating cash flow, simplistically, looking at what you're now -- you describe as a more typical quarter, Q1, if I annualized to today's cash flow, you're already there.

Now I know there's a seasonal bias, but how does --?

In the context of --does anything we've seen today, or anything you've delivered today, should it give us much greater confidence around the implicit guidance and indications you've given for the 2015/2016 years via those particular charts?

Yes.

The confidence you should take would be Repsol LNG.

It from day 1 contributed excellent.

The deep-water projects are coming on stream.

They didn't do a lot for us in cash terms in Q1, but they will.

Majnoon also; the same is true there.

And I think structurally, there is some indication of downstream, all products in particular.

Chemicals remains very robust, but all products, structural improvements are being sustained.

Still some way to go, and it's too early to tell on the shale, to be honest.

But the strategic intent is, of course, to continue to grow the cash flow and free -- the cash generation and the free cash flow, and I think we need -- it was a good quarter, but we need two/three/four more quarters the same before we get anywhere near claiming victory.

And that message is directed as much internally as it is at you guys.

Okay.

Final comment.

It is good to see Shell delivering more of what it should be capable of.

That's all.

Thank you.

Good reflection on the underlying quality of the portfolio.

Thanks there, Lucas.

Move on to the next question.

Peter Hutton, RBC.

Moving away from the focus on Q1 versus Q4, etc., can I just take a step back on some of the longer term?

And I think you're very clear in the reiteration that the key focus is the improvement in the ROCE, and of course, that can be done from two things.

That's come from delivering improvements in profitability and also reducing the capital employed.

How should we really be thinking in terms of balance of these drivers?

When you're talking about balancing growth with returns, does that imply we should be thinking about half and half of -- the contribution coming from about half and half of those two drivers?

That's the first question.

And the second one is on organic CapEx.

What's the optionality around the $35 billion organic CapEx that you've guided for 2014?

If you are getting stronger cash flows, and I know it's very early days, but theoretically, if those cash flows are coming through more strongly, how should we think of the direction of those incremental cash flows between return to shareholders and improving or increasing your organic CapEx?

It's a good question, the second one, Peter, and I'll come back to it.

Balancing growth and returns, you can get growth in the numerator and you can also improve returns by reducing the nominator.

The capital employed is likely to continue to grow, I think.

We are investing at levels much higher than our depreciation rate, and we are -- fundamentally, the divestment program is not going to be big enough to completely reverse that trend.

It may keep it stable for a period, but the improving returns have to come from growing the numerator, the earnings, in line with the cash from operations.

So that's the primary driver.

$35 billion optionality, well, either up or down, there's probably limited optionality.

There is uncertainty though for the 2014 program.

The uncertainty is twofold.

One, it's actually quite difficult to very specifically identify spend and the date at which it gets spent in a four-year project so there's always movement over year-end.

And there are also investment dollars associated with some of the assets.

We intend to divest now Australia; both the downstream and Wheatstone were good examples of that.

So the timing of some divestments actually divests investment, if that makes sense.

So our aim is $35 billion organic for the year.

Our current expectation is still hopefully $35 billion for this year.

The actual outcome could be a little bit more, a little bit less, depending on timing effects.

The more important question, where is the priority for allocation of cash flow, I think Ben's been very clear, and hopefully I reiterate it also; until we demonstrate sustainable cash flows at the level that would enable a higher level of investment, there won't be any higher level of investment.

And that's far from clearly demonstrated.

We need, not just for our own purposes but with the equity and debt markets themselves, to earn the license to invest and to deliver the strategy going forward.

So we need to see further and more sustainable cash flow generation before we talk about anything beyond $35 billion, which means the first priority on the additional cash flow is, obviously, dividend.

It is managing the balance sheet; always good to have a flexible balance sheet if it's a buyers' market.

And it would be buybacks, as and when we can do that in an economically efficient way.

Thanks.

That's very clear.

Thanks, Peter.

We have one more question, I think.

Thank you.

(Operator Instructions).

Okay.

Thank you.

We have no more questions.

Please continue.

Thank you very much.

We had a good call.

Thanks for joining the call.

Particularly, as I say, our friends from the US have had an early start, and also those of you who may have had to choose between calls.

There's an awful lot of reporting happening over this week.

The second quarter results for Shell, they'll be released on July 31, 2014.

We'll be back to a Thursday for reporting.

Today was only because the markets are closed for May Day tomorrow in Europe.

Ben and myself will be available to talk to you all then.

I look forward to discussing further progress on that longer-term strategic delivery.

Thank you very much.

Thank you.

This concludes the conference call.

Thank you for participating.

You may now disconnect.