殼牌 (SHEL) 2015 Q4 法說會逐字稿

Welcome to the Royal Dutch Shell Q4 2015 and full-year results announcement call.

There will be a presentation followed by a Q&A session.

(Operator Instructions)

I would like to introduce your host, Mr. Ben van Buerden.

Please go ahead, sir.

Thank you very much, operator, and welcome to today's presentation, ladies and gentlemen.

So you will have seen that we pre-released our fourth quarter 2015 results earlier in the year, on January 20.

We wanted to do that ahead of the shareholder vote on the BG transaction and this morning we've confirmed our fourth quarter results.

But before we go there, let me highlight again the disclaimer statement to you.

So again, our integrated business mix is helping to support our results in what is a quite challenging industry environment today.

So we're pulling on powerful financial levers to manage the Company in the industry downturn.

We are reducing costs and capital investment, as we refocus the Company and we respond to lower oil prices.

For the combination with BG, the completion of the transaction expected to take place on the February 15, will mark the start of a new chapter in Shell that will rejuvenate the Company and to aim to improve shareholder returns.

Shell is becoming a Company that is more focused on its core strength, a Company that is more resilient and competitive at all points in the oil price cycle, and has a more predictable development pipeline.

Let me first update you on our [health and safety] performance, because as you know, the health and safety of our people and our neighbors and our environmental performance remain the top priorities for Shell.

And I believe that we have the right safety culture in the Company.

Our track record is improving and is competitive.

But also in 2015, we did regrettably have fatalities and other safety incidents; so we will continue with our safety drive, which is called Goal Zero, to also further improve here.

Shell's current cost of supply earnings for the year, excluding identified items, were $10.7 billion.

And our results are, of course, lower with the lower oil & gas prices, but as I said, our business mix is also offsetting some of that.

And integrated gas and downstream are delivering a strong performance.

And the balance sheet gearing remained low at year-end 2015, despite a downturn.

We're pulling on powerful financial levers in the oil price downturn to maintain the strong balance sheet, to protect our ability to pay dividends, and to keep a sensible and high value investment program underway for the future.

And this is a substantial package of measures and I think we've achieved a lot in 2015.

We have identified major commitments to improve performance further over the next few years, including from the combination with BG, as we get under the hood there, following expected completion on the February 15.

We've reduced our operating and capital costs by a combined $12.5 billion in 2015.

Our operating costs fell by $4 billion in 2015, as our sustainable cost reduction programs gather pace, and Shell's costs should further reduce in 2016 by some $3 billion.

Now on the capital investment side, we delivered 2015 capital investment at around $29 billion.

And that's almost 25%, or $8.5 billion reduction from the 2014 levels, and more than 35% less than the recent peak in 2013.

And when I look into 2016, we're expecting combined spending to be lower this year, to be around $33 billion, with options on the table to further reduce our spending again, should conditions warrant that step.

Impactful decisions on capital investments are driving the right outcomes here.

Only the most competitive projects are going ahead, just four major investment decisions in 2015, of which three in the downstream, and many potential projects have been purposely delayed, rephased or cancelled altogether.

And this is to manage affordability and to get better value from the supply chain in this downturn.

So you will have heard earlier this year that we have also halted work on the Bab Sour gas project in Abu Dhabi.

This simply didn't rank in our portfolio.

And we are postponing the final investment decision on LNG Canada right through the end of this year and Bonga Southwest in deepwater Nigeria to 2017.

If I then turn to asset sales for 2014 and 2015, we have delivered over $20 billion of divestments, and that exceeded our earlier $15 billion target that we set for that same period.

And we have still further deals in the pipeline, such as [Shore] Shell, Denmark Marketing, and the sale of our share holding in Shell Refining Company in Malaysia.

We are executing plans for a $30 billion divestment program for 2016 to 2018, as we consolidate BG in our portfolio.

And this will build over the next three year period, and 2016 is likely to see asset sales below $10 billion.

The buyers are there, particularly in the downstream and some local gas markets, and in more non-traditional routes, such as MLPs, private equity, and some other oil and gas companies.

Our MLP, Shell Midstream Partners, is set to deliver between 10% to 15% of the total disposal target that we've set over the three years.

Then if I turn to project flow, which is an important element of improving our free cash flow position, there were, of course, relatively few start-ups from the Shell portfolio in 2015, as we said earlier, at the beginning of this year.

At the same time, though, it was good to see BG successfully starting up two LNG trains in Queensland and continuing to ramp up in non-operated Brazil.

And this resulted in around 16% volume growth for BG in 2015, and of course, underlines why we like that combination of BG and Shell.

These BG growth projects will be a strong complementary fit to the Shell project flow, where we should see more fundamental growth in the 2016 to 2019 time frame, as the next wave of large projects comes on stream.

Restructuring in underperforming parts of the Company is and will remain an important lever to improve our financial performance.

There is more to come in the downstream.

But at the same time, we've also achieved a lot there already.

So we've delivered almost $10 billion of clean earnings, $14 billion of cash from operations, and over 20% return from the downstream in 2015.

So compare that to 2007.

As you see in this chart, that is an 18% increase in earnings from a 20% smaller portfolio and a broadly similar refining margin environment.

And I think there's an important read through to the upstream here, as we launch a more fundamental review of portfolio and capital allocation going forward.

So the BG transaction is now close to completion, following widespread support from both Shell and BG shareholders at the shareholder meetings last week.

As I said, the effective date is anticipated to be February 15 and integration planning is well underway.

We had meetings of the key management teams of both companies here in the Hague in the last few days.

The chart here shows some of the key numbers and commitments around the BG deal and really, there is no change here.

These commitments support all the statements made in the prospectus, which remain unchanged.

We are planning that following completion 2016, we will be the integration year, as we drive these programs forward.

And we'll update you on the progress in these areas in the future, and I'm really looking forward to that, as well.

The chart here shows the capital investments that we are planning for 2016 on a combined Shell and BG basis.

Now you may understand, these allocations may change in the detail as we get more insight in the BG portfolio, of course.

In downstream, we see growth prospects, particularly in chemicals.

The conventional oil and gas portfolio spans areas such as the North Sea, Kazakhstan, Nigeria onshore, Southeast Asia, and we are reviewing all of this.

Integrated gas and deepwater, which has been growth priorities for Shell in recent years, will reach significant scale with BG positions included, really accelerating the delivery of the growth we had targeted there.

And shales and heavy oil remain with long-term potential, with reduced spending following restructuring programs in recent years.

So all of this means that with BG in the portfolio, we anticipate having more predictability in the Company and a lot smarter sequencing of the project opportunity funnels in each of the themes.

Now let me hand you over to Simon.

Thanks, Ben.

I gave our results in summary form on January 20, and the figures here today confirm that update.

There are no real changes.

So you'll see a series of waterfall charts at the end of today's slide pack that give you some of the moving parts, and I'll be delighted to take any questions on that later.

In summary on the quarter, excluding identified items, Shell's current cost of supply, or CCS earnings, were $1.8 billion, that's a 44% decrease in earnings per share from the fourth quarter 2014.

On a Q4 to Q4 basis, we saw significantly lower earnings in upstream, similar earnings in the downstream.

Return on average capital employed was 4.8% -- that's excluding identified items -- and the cash flow from operations was over $5 billion.

Our dividend distributed for the fourth quarter of 2015, similar to year-ago levels at $3 billion, or $0.47 per share.

Turning now to reserves.

Our Securities and Exchange Commission, or SEC proved reserves, at the end of 2015 were 11.7 billion barrels of oil equivalent.

That's a reduction of 1.4 billion barrels from the end of 2014.

Falling oil prices have reduced Shell's reserves in 2015, a 47% decline in oil price -- that's the fall to $53 or so -- compared with 2014.

Net year average price effect was 1.7 billion barrels, although that did include 0.4 billion barrels from the debooking at Common Creek in Canada which would not have survived on a price check; but in fact, that project, of course, we subsequently cancelled in 2015.

Though some offsets to the negatives, and it was good to see that the impact of cost reduction programs elsewhere in Canada, at the Oil Sands mining operation, where the actual cash operating costs have come down to $29 a barrel by the fourth quarter last year.

Integrated gas earnings for 2015 were $5.2 billion.

That's a decrease of 50%, because of the LNG prices track down in line with the oil price.

However, global gas demand has been growing at 2.3% per annum over the last decade, and the LNG demand within that has grown at 8% per year.

But LNG is still only 10% of the overall total gas demand.

It's becoming clear that although the medium term outlook for LNG demand growth in China is robust, in the near term the LNG demand growth is slowing there, and potentially in some other countries.

But it's really important to look at the development of the global LNG market overall.

In recent years, both the LNG demand and supply have substantially diversified, today, 30 importing and 20 exporting countries, that's 30 different markets.

And that's expected to grow to as many as 50 importing countries, 25 exporting by early next decade.

Some highlights during the past year, during 2015, we did sign new LNG sales deals add to approximately 4 million tons per annum, typically 10 years or longer contract length, and linked to oil prices.

We closed over 10 scheduled contractual price reviews across Asia Pacific joint ventures that reinforced traditional oil linkage levels of LNG contracts and simultaneously made progress at Shell in accessing new markets, such as Myanmar, India, the Philippines, Jordan, Malta, and Gibraltar.

Turning now to the financial framework.

I can't reiterate often enough that we plan the financial framework on a long-term basis, multi-year, not for any given year or quarter.

We aim to balance cash in and cash out across the cycle.

And you see on the chart here that, by and large, we're delivering on that strategy, five years, three years, one year.

And the oil price breakeven point does, of course, move with the oil price, because that links with the time lag to the industry costs.

Our breakeven has fallen in the last year, and you can see that here.

And we have options to further reduce that level, such as asset sales, capital spending.

And there's no change to our guidance on dividends, $1.88 per share was declared for 2015 and we confirm our intention to pay at least that amount, $1.88 per share, for 2016.

You will see enhanced financial disclosures from the Company from the first quarter of 2016.

In practice, the first quarter results will include two months of BG performance.

Effective from the start of this year, we already have a new upstream organization that reflects recent changes in the portfolio, and that's the platform for integration with BG.

The organization will help speed up the streamlining of the portfolio following the closure of the deal, and we will therefore report integrated gas earnings separately from upstream, rather as a memo item, and in more detail than in the past.

In the downstream, we will give earnings splits through the combination of refining and trading, which we see as closely linked, and the contribution from Marketing separately.

This should help investors understand the earnings drivers in the downstream in more detail.

Now let me also flag to you, there are some indicators for the first quarter results in the announcement this morning that are also in the back-up slides in the pack today.

So with that, let me hand you back to Ben.

Okay.

Thanks, Simon.

So before we close, let's have a quick look on the competitive position.

You know that we take a dashboard approach here and we are looking for more competitive performance on a range of metrics and over time, so not single point outcomes.

And you can see the trends here are downwards, tracking oil prices, and our aim is to be competitive across the price cycle.

And we realize that there is still a lot to do here, as well.

So let's quickly sum up.

First of all, we are pulling on powerful financial levers to manage the Company in the industry downturn, and Shell is becoming a company now that is more focused on its core strength, a company that is more resilient and competitive at all points in the oil price cycle, while having a more predictable development pipeline.

And this will improve our shareholder returns.

With that, let's take your questions.

So can I, as usual, have just one or two of each, so that everyone has the opportunity to ask a question in the time remaining.

And Operator, can you please poll for questions?

Thank you.

(Operator Instructions)

We will now take our first question from Thomas Adolff of Credit Suisse.

Hello, guys.

Two questions for me, please.

One, the first one for Simon.

And I guess the second one, as well.

Simon, in your own words from earlier this year, you said Shell has been good at spending and not so good at earning and that change is on its way from within.

So I guess my question is, what is the size of the price for Shell standalone if you become less bureaucratic, more lean and efficient by, say, 2017 and 2018, and more linked to return and the return profile, whether it could be as good as Exxon's?

The second question is on CapEx, the $33 billion.

And you say further reduction, if it warrants.

And if it does, I wondered where it is coming from, since I can't really see any FIDs being included really in that $33 billion and yet you're still spending about $10 billion more than Exxon.

Thank you.

Thanks, Thomas.

I'll have a go, but Ben might want to comment on the second one -- on the first one, sorry -- there are two separate questions, really.

The better at spending than earning, I'm not going to verify that quote, but the point was that it has been on occasion recognizing performance on spending or generating new opportunities more than operating.

And that was a comment about internal culture, which is what your second point is about.

The idea that Shell is bureaucratic relative to other players in the industry is an utter and complete myth.

Believe me, we deal with all other players in the industry, and we are more than capable of moving quickly, decisively and acting.

And just as a proof point, exactly 12 months ago, we were accused of exactly that and not getting to grips with the reality of the macro environment, as we saw it.

Since then, we said we would do what we needed to do in that environment.

Since then, we took $8.5 billion out of the capital relative to the previous year and $4 billion out of the OpEx.

By the way, we don't include energy costs in that.

And I would challenge you to find any of our more agile, nimble competitors that got anywhere near that figure.

So the size of the prize, yes, it's material, because what we took out was not slash and burn.

It was, as we stated 12 months ago, sustainable.

It was acceleration, if anything, of existing cost improvement, performance improvement and operational excellence improvement programs.

That's why there's more to come this year, another $3 billion there to Shell.

And let's see where we get in terms of return on capital, because we have to absorb the capital from the BG acquisition and live with the life cycle effect of some of the balance sheet that we carry, for example, the $100 billion on Shell's balance sheet today, $31 billion of cash, $46 billion of assets under construction, and $20-odd billion of exploration-related assets.

As that capital becomes productive, it will more than offset the impact of the BG capital.

And yes, we would expect to move to a more competitive and long-term sustainable position on return on capital.

CapEx reductions below $33 billion reflect on where we've come from.

In 2013, the pro forma Shell plus BG was $58 billion.

In 2014, it was $47 billion; and in 2015, it was 36 billion.

The $33 billion reflects our best estimate.

But as we said last year, there are still some decisions to make as we go forward, both on large projects.

And we said today that Bonga Southwest, LNG Canada, they are effectively pushed out into the future as new investment decisions and we've taken costs out in the supply chain last year.

We expect to take more out this year.

So there is potential.

But our focus in the next three, four months is safe, successful integration.

Let's get after those synergies and we'll update on what the CapEx looks like.

And we won't do -- we'll take all the right decisions and move quickly where we need to on the CapEx between now and then, and we'll update in the middle of the year.

Thanks for that time, and I can't think of anything to add to that first point.

Can I have the next question please, operator?

Certainly.

Our next question comes from Theepan Jothilingam of Nomura.

Yes, hello.

Good afternoon, gentlemen.

Could you just remind us again how you think about the credit rating from here?

How important is the single [AM]?

What's the right balance then between protecting the balance sheet and the dividend?

Thank you.

Simon?

Thanks, Theepan.

The credit rating is important.

We need to be able to continue business, whether it's access to the capital markets or counter party in the trading business.

So it does matter.

An A rating doesn't preclude us from either of those, or the more general reputational importance on working with partners and governments.

It is, however, important that we do protect an investment grade rating and that we manage the balance sheet accordingly.

We spoke quite a lot previously about the importance of the dividend and the cash, the priorities for use of cash.

And I have no changes to state today.

So it's essentially the dividend comes first, then we need to address, effectively, the gearing, the providers of capital on the balance sheet, the financing; and then the choice is between reinvestment and buybacks.

And that is our stated approach and no changes.

We expect post BG, the gearing will increase from around 14%, which is the lowest in the industry at the moment for the big players, to the low 20s.

It's not clear exactly, because we'll need to complete the accounting, but somewhere in the low 20%.

And as is important, as I think I've made clear before, that thereafter, we do what we can to turn that number downwards again before we start to make other choices about allocation of capital.

But the dividend is underwritten and the dividend policy remains -- it's underwritten for this year and the policy remains unchanged.

Okay.

Thanks, Theepan.

Thanks, Simon.

Can I have the next question, please?

Certainly.

Our next question comes from Jon Rigby of UBS.

Yes, thank you.

So two related questions, actually.

You noted the high votes approving the deal on both sides, although I'd note there was a reasonable percentage that voted against on the Shell side.

So given that you were very active in meeting institutional investors and dealing with the market through January in the run up to the vote, could you perhaps talk a little bit about where you felt there were misgivings in maybe how you were articulating the benefits of the deal, or maybe where you needed to push further in persuading people that the deal worked and was good for you?

And then through the second follow-up, as I understand it, I think it's been widely reported in the press, there was a get together of the senior executives from both sides of the Company, I think last weekend.

And I just wondered whether there was anything, any impressions, anything you can talk about that came out of that vis-a-vis the combination going forward?

Thank you.

Okay.

Thanks, Jon.

Let me take both of them.

Indeed, we were very happy with the high vote on both sides.

I thought 83% was a very strong endorsement in a, shall we say, very nervous market environment that we are operating in.

I think in terms of misgivings, as you call them, I think there is indeed concern about the oil price outlook, I think that was on people's mind, and I think, in general, sort of nervousness and concern with where the market was going in that period.

I think that's behind us now.

I think we move forward.

It's now for us to demonstrate that the majority of the shareholders that voted for this were right.

And we will do that.

The meeting that we had on Friday, Saturday, Sunday was a very good meeting.

We had all the key country managers, top managers from both organizations in areas that are affected, together in this preparation for day one.

I think the atmosphere was really good.

It was one of let's make this happen.

I was incredibly impressed with the quality of the preparations already, but also the enthusiasm and the excitedness of excitement of certainly the BG staff and the Shell staff equally matched going forward.

We now have, of course, all of the follow on work, as we really make sure that we get ready for day one, all of the practicalities of stakeholder management from day one, detailed delivery of the value plans that we have set out that now need to be populated.

And we are all looking forward to that day when we will, as an executive team, be spread out over key locations around the globe to celebrate together with our new colleagues the birth of the most exciting energy company in the world.

So Simon and I were reflecting on it actually at the end of the weekend, wouldn't it be great if you had a few of our investors, analysts and media commentary, because I think it would have left a deep impression on all of you.

Anyway, thanks, Jon.

Operator, can we have the next question, please?

Thank you.

Our next question comes from Martijn Rats of Morgan Stanley.

Good afternoon.

I wanted to ask you two things.

First of all, can you talk a bit about the downstream?

Because towards the tail end of 2015 and early 2016 now, we've seen a fair bit of weakness in oil demand coming through.

And it's very difficult to understand to what extent and by how much that impacts the earnings throughout the downstream, and particularly coming after such a strong year 2015, I was hoping you could provide some forward-looking comments on that.

The second thing I wanted to ask you goes back to this time last year, when we also talked about the CapEx.

And back then, you indicated initially that your intention was to keep CapEx flat.

And there was very much the impression, or at least my reading of the situation, that a lot was locked in and that in a short period of time, you can't really do all that much.

Yet if you then look at the actual amount of CapEx savings that have been realized this year are rather large, so clearly it seems that there was some flexibility that emerged during the course of the year that it seems you didn't foresee in January.

And I was wondering where that flexibility is and what at some point made you able to make the reductions in CapEx that in January 2015 still looked more rigid, so to say?

Thanks, Martijn.

I'll take the second one and Simon can talk in a bit more detail to the downstream point.

I think, despite what Simon said in response to Thomas' first question, I do think we probably got the messaging wrong in January, right?

So we've said that since.

Indeed, we did give the impression that we were not going to move from a number and that we were basically in a wait-and-see mode.

I think that impression was wrongly created, was certainly not the intention of the messages that we had.

Because in reality, what we said is it's not going to be more than $35 billion, and we'll manage it down to a level that we think is appropriate for the year, but we will not prematurely cancel all sorts of things and clearly regrets on day one.

We will make the decisions one decision at the time.

And that's what we ended up doing.

And of course, a number of things happened during the year.

First of all, we worked very hard on significant cost take outs.

We ended up, just for the year, reviewing 7,000 contracts in our Contracting and Procurements department, mostly focused, of course, on the upstream, representing about 80% of the upstream project spend, to see what we could gain there in terms of capital efficiencies.

And we worked very, very hard on individual project options.

Do they make sense?

Can we postpone them?

Can we maybe, in some cases, rework them, as we started doing?

And is this project as competitive as it can be, given the falling oil price environment and the room that is opening up in the supply chain?

And a lot of that is indeed, back to the agility that Simon mentioned, we were very, very keen to make sure we made the right decisions one decision at a time, rather than up front regretting everything and then see what happens.

And it showed in not only our ability to act, but I think it also shows how much flex there really is in the system, if you want to live within your means, which is exactly what we, of course, set out to do.

Remember, the gearing didn't move at all in the first three quarter of the year, and in the last quarter, it edged up to 1.8 percentage points.

Now, we will be pretty much in the same game in 2016.

Don't ask me exactly how that will go, because again, it will be one decision at a time.

But generally it will be the same recipe, whatever we can postpone, we will postpone, and we will only go ahead with projects that are both affordable, or it is use it or lose it, and they are going to be competitive in the environment that we envisage.

Now some of it is going to be a bit clear, or rather unclear to see, take the spend on BG.

We don't know exactly what it is, we don't know exactly what sits in there.

So we will have to wait for the 15th or 16th of February before we start getting access to that.

We have decent ideas, so therefore we are okay to mention a $33 billion number at this stage.

But what it really will be, I'm afraid you will have to wait for how the year plays out, bearing in mind that we have at least one year of pretty good track record in this space.

But let me hand it over to Simon to talk a bit about the downstream, which will be an important part of this year, as well.

Many thanks, Ben.

Thanks for the question, Martijn.

The downstream had, I think, its best ever year in terms of underlying performance.

It was aided in prices better refining margins than we'd seen since maybe 2007-2008 period.

And towards the end of the year, the refining margins did come off a bit, although they have come back a bit at the beginning of January in this year.

The actual impact for the quarter in margin terms is maybe only $100 million plus.

But the actual performance of Shell Refining, and Chemicals, for that matter, was less good in the fourth quarter than it had been during the year.

And we also had a higher level of planned turnaround activity, which I think we'd already flagged, partly because we deferred some from the earlier part of the year when margins are more attractive.

So overall, we're probably a few hundred million down across Refining and Chemicals relative to where we have been earlier in the year, for those two reasons.

Marketing margins were also under a bit of pressure in the fourth quarter.

But over the year as a whole, Marketing activity set a very strong performance, good new product introductions, (Indiscernible), new lubricants, new markets.

We're about $500 million up on the year in the Marketing performance year-on-year.

So quite solid, sustainable performance improvements from downstream.

Remember, around half of, or maybe more than half of the total downstream, is not linked to that volatile refining margin.

It's pretty solid, predictable, ratable income stream.

Okay.

Thanks, Simon.

Thanks, Martijn.

Can I have the next question please, operator?

Certainly.

(Operator Instructions)

We will now take our next question from (inaudible) of CLSA.

Thanks.

Hello, everyone.

So two questions, one on Brazil and a second on Nigeria, if I may.

You have a small project in Brazil that's starting, BC10 Phase 3, and then Libra is in the works for a 2018 start.

Could you talk about the current operating environment, how you see the outlook unfolding.

So that's on Brazil.

And second, on Nigeria, surprised by the postponement of Bonga Southwest, given the relative size of the project and your footprint of the region.

Could you speak to the relative cost structure in Nigeria in the current operating environment, please?

Yes.

Okay.

Thank you very much.

I'll have a first go at both of them, and perhaps Simon wants to add a few points, as well.

Brazil is, of course, now becoming a key country for us.

Of course, it was always an important country, a country that we have operated in for 104 years, so we know it quite well, and in BC10 and, of course, coming up, Libra, a very important project.

And of course, it will be significantly more with the addition of the BG position.

So we do pay a lot of attention to the environment, what is happening in Brazil, not just the general macroeconomic environment, but also what is happening in terms of fiscal stability and other factors.

And of course, we have been very, very close with the Brazilian government to understand what their intentions are, to get assurances from them in areas where we needed them.

And you will have seen in the media that quite a few of the plans, the aspects that were talked about over the Christmas period have now also gone away.

But Brazil will remain, of course, a key critical country for us, so we will continue to pay great attention to what is happening there.

In terms of our partner, Petrobras, yes, they are going through a very difficult phase, as well.

But at the same time, they are a technically competent player.

They have been very clear in all the restructuring and reprioritization that they have done within their portfolio that the (Indiscernible) portfolio remains crucially important, and that is also very clear within the government that that should be a priority in general.

The entire industry is very clearly a priority for the executive branch, because they realize that this is going to be a key element on which the economy will float.

And therefore, I think we are fundamentally still in a strong and advantaged position, which doesn't mean that we should be complacent, as we are never complacent in any of the big countries where we have significant positions.

Nigeria, Bonga Southwest, indeed fundamentally ought to be a good project.

It has very strong fundamentals.

It will operate an existing PSE.

It is taking advantage of very strong organizational and other infrastructure that we have in country.

But again, we need to get to a point that we believe not only is the project affordable -- by the way, affordable for both the government and for Shell -- but also competitive.

Bonga Southwest came back in its first presentation in the early part of 2015, when we saw a capital number which was reminiscent of $100 oil, and we have to work that down to a level that is much more in line with the outlook that we currently have, the environment that we are seeing.

And we are very clear between not only our partners, but also the government, that this is something that we want to do.

Because the spend that we will have on this project will, of course, because of the fact that it sits in PSE, go at the expense of government revenue.

So I don't think we are at that point, at this point in time, and therefore, I think this will only materialize as a rerun in 2017.

But the fundamentals of the project, in my mind, as you rightly point out, they remain strong.

Okay, Operator, can I have the last question?

Is there any further questions?

We have no further questions at this time.

(Operator Instructions)

Apologies.

We will now take our next question from Alastair Syme of Citi.

Thank you.

Hello, Ben and Simon.

Can I clarify the mechanics of how you're going to put together the business plan ahead of the 7th of June?

I guess you get to see the assets from the 15th of February.

You must do some rerunning of business plans, and I guess there's a macro assumption, a long-term planning assumption that will be implicit in that.

And I know you're not disclosing specific thoughts on the macro.

But will you be using the same macro deck that you used for the business plan last summer?

That one is probably for me, Alistair.

It's a great question, thank you.

We obviously have put our plan together back in October, November.

We actually have more than one price line in there, in terms of what we can do, what we need to do.

I happen to know that BG's done pretty much the same thing, with relatively similar price line.

So we're both working on one forward projection, which is quite similar, as the baseline, and both of us have, and what would we do if the price turns out to be at the lower level.

But legally and formally, we do not have access to the details of the BG planning information until the 15th of February.

So we won't actually get under the hood.

So the best estimate that we can make, pretty much the same as yourself, and this probably goes for a few months, is pro forma have the two companies reflect $1 billion of depreciation of the PPA, the purchase price premium that we are willing to pay.

And we'll confirm that figure in the Q1 results, I expect, as we won't know that until we've put the accounting systems together.

But it's going to be about $1 billion a year, take off some synergies and add on a business cost for one-off activities associated with the integration, which is said to be $1 billion and a little bit, $1.2 billion, $1.3 billion.

It's not all incurred this year, though.

The synergies, $3.5 billion by 2018, we should deliver some of them this year, may not offset all of the one-off costs this year, but we should be in a good position to have a net positive contribution in 2017, and obviously, the full contribution in 2018.

When we literally do, as you say, you get together, and of the weekend, the three days, quite a bit of it was spent doing this.

The qualitative identification of opportunity, both precisely how and who is going to deliver the cost synergy on both sides of the fence, but also what are the value opportunities beyond the stated cost synergy?

And that is something that we are looking to nail down, at least in qualitative, and to the maximum extent possible, quantitative terms by the Capital Markets Day in June.

Some of it will be directional by then.

But that essentially is going to be the process going forward.

Then, of course, we put our plan together towards the end of the year.

And that actually is a bit of a watershed moment.

It will be the last time people are talking about Shell and BG.

We will be one company by then, and it will give us, as of 1st of January 2017, one view of the future and one collective set of accountabilities to delivering it.

And interestingly, going into that process, we know what the outcome needs to be, because we've already made the commitments externally on things like earnings per share, accretion, the financial framework, the divestments, and where we expect to take the combined Company in the coming years.

So I hope that helps, Alistair, and it also gives a bit of a feel for what you might see Q1, Q2.

It's not going to be easy to predict or to estimate, either for the listeners on the call or for others in the companies.

Our focus is really on ensuring that we are able to report for the first quarter with a full level of integrity and that we operate the assets safely as of day one.

Okay.

Thanks, Simon.

Thanks, Alastair.

I believe we have a few more questions.

So Operator, can we have the next question, please?

Certainly.

Our next question comes from Lydia Rainforth of Barclays.

Thanks and good afternoon.

A couple of questions, if I could.

The first one, just on OpEx and idea of the $3 billion cost savings target.

Is it getting easier, do you think, to make those cost savings as the organization is just getting used to working in a slightly different way, or is it actually getting more difficult, given how much you've already taken out?

And then the second one is an accounting one.

And Simon, apology, I should probably know the answer to this already.

But within the fourth quarter cash flow numbers, was there any particular cash impact from any of the restructuring charges that were associated with the cost savings?

Thank you.

Thanks, Lydia.

Let me take the first question, and then maybe Simon wants to add his perspective to it and also talk about the second one.

I think in a way, it's probably getting easier.

First of all, the number that we mentioned, the $4 billion cost take out for last year, is an all-in number.

It's the net number.

At the end of the day, our costs have come down.

With it, of course, are all the one-offs, all the specials, all the redundancy costs, all of the things that basically are the price you pay for taking cost out.

Of course, some of it may also reoccur in 2016, but some of it also won't occur.

So in terms of headline delivery, that is a bit of following wind that we have.

But at the same time, I think it's not just a matter that people are getting more practiced at cost take outs.

Believe me, we didn't discover the importance of cost take outs in 2015.

We have been working on that, of course, for quite some time.

But I do think, and as we still see quite a challenging environment, I think people are more accustomed to challenging paradigms in the supply chain and are seeing more receptiveness on the supply chain, as well.

So I think that makes it easier, the fact that everybody is joined up and jointly committed to doing it, because there is really no alternative.

I think what gets also easier is to do more fundamental supply chain transformation.

So how can we work together with some of our core suppliers, not by just putting more competitive pressure on them, but finding new ways of working, taking costs out through fundamental efficiencies across the interface, that are going to be there for years to come, also going price close the oil price, and therefore, inflationary pressures come back again.

So I do think in that sense, yes, it is easier, and in that sense, in a way, I also hope that we will have a period to complete all the things that we have in motion.

And it is not because I'm afraid that Shell people will lapse back into perceived old behavior.

I think that's not the issue that we're talking about.

There is just more capacity to do things differently in the industry if there is collective pressure on all of us.

So yes, I therefore think the $3 billion is easily doable.

And on top of it, bear in mind, we also have a tremendous productivity improvement that we can realize as a result of the combination with BG.

In this sense, BG will do two things for us.

It will give us the best of a benchmark that you can ever expect in the industry.

This is not going to be some sort of benchmarking report that people say, well, there seems to be an opportunity for you here, because somebody else somehow is able to do something better.

We will be able to not only get these numbers, but we will be able to work with the people to see what different practices may be around.

And I would fully expect that there are things that we can learn from BG, as well as the other way around.

So it is something else, in terms of benchmarking.

And on top of it, it's a great opportunity to look at productivity.

Can we incorporate more operational activity without really increasing the supporting cost that we have?

So economies of scale.

So I think that 2016 will indeed see continued momentum the same way that we have had in 2015.

Simon?

So I wouldn't augment that particular answer too much.

I agree, it is getting easier.

Eventually, it gets harder.

But for the moment, there's a sweet spot.

Because of $35 oil, nobody needs persuading what is the right thing to do.

And the opportunity that comes with BG is another great catalyst to just get the organization to a better place.

And as I say, one day it will get harder, but good momentum in the system at the moment.

And Q4 cash impact of restructuring.

Q4 did include the cash impact from rig cancellation associated with the Alaska program, which we provided for in the third quarter and we talked in the fourth, in cash terms, where we effectively did end the contract.

There are some fees, some deal associated spend, but not that significant.

And there is severance that was associated with the 7,000 redundancies, or fewer people, that we've previously spoken about.

But in total, not that significant, other than the rigs.

So most of the one-off costs start to be incurred going forward.

There's always a one-off, or a phasing of tax payments, as well, of course, in the fourth quarter, so that does impact somewhat on the fourth quarter cash flow.

But overall, the fourth quarter cash flow and the annual cash flow showed good correlation with the earnings.

So it's quite a solid underlying performance that we've seen on the cash $30 billion in, and it gave us the $7.5 billion of free cash flow in the year, once we take investments and divestments into account.

Okay.

Thanks, Simon.

Thanks, Lydia.

Operator, can I have the next question, please?

Our next question comes from Biraj Borkhatraria of Royal Bank of Canada.

Hello.

Thanks for taking my questions.

I have two, if I may.

The first one, just a Q4 specific one.

You had a particularly strong quarter for the integrated gas business.

And I gather there's some FX impacts in there, but I was wondering if you could give any color on the actual trading performance in the fourth quarter, as one of your peers actually highlighted a particularly weak quarter in Q4?

And the second question was, looking ahead to 2016 and the gearing numbers, you've mentioned a few times that in low- to mid-20 gearing is about as far as you want to go.

And I wonder if the disposal market is not as strong as you would like it to be, how far would you be willing to let that drift upwards if you're not getting the value that you want for the assets you want to sell?

Thanks.

Thanks, Biraj.

Simon, can I hand it over to you?

Thanks, Biraj.

Yes, in Australia, the deferred tax asset in integrated gas had a positive movement in the quarter, a couple of hundred million.

Other than that, the gas business is a strong business.

We have good, long-term contracts in place.

Overall for the year, the realized price in LNG was just under $8.00, compared to something over $13.00 a year earlier.

And it's the marketing mix that gives us the resilience and the diversity to be able to not only achieve good results in a tough environment in the IG, but also have a platform to develop the new contracts that I talked about in the speech.

The gearing, low 20s, you're absolutely right.

Mid 20s is about as far as I might like it to go.

Looking at the credit rating metrics themselves, we get stretched in the mid-20s.

But also in terms of the flexibility on the cash flow and the opportunities that you could take, mid-20s is probably as high as we feel comfortable.

We do not intend to be giving assets away just to meet the gearing targets at all.

And maybe if Ben wants to pick up of some of the philosophical and value driven elements of the divestment program.

But we need to make a balance, taking all factors into account.

The first point of the call has to be reduce the OpEx.

Second point of call, manage carefully the CapEx and the divestments, most likely focused in the first instance on downstream, and then whatever other levers we can pull.

So Ben, philosophically, that's an important point.

I think that is a neat philosophy that you also laid out in the context of the deal.

I think on the disposals, I think it is probably fair to say that the $30 billion that we talk about for the next three years is most likely going to be a little bit more back end loaded than front end loaded.

So I don't think this is going to be 10-10-10.

It may well be a bit less than 10 in the first year.

And definitely, it will be more dominated by downstream midstream assets in the beginning than in the end.

But we do have a great handle on what sits in the 30, and we have the next 30 waiting.

And here we're talking just about Shell legacy assets only.

And the first 10, 15 that we are focusing on, by and large, these assets that have very low sensitivity to the oil price and indeed have a very large downstream and midstream component in it.

So I do think we can execute that program over that three-year period.

Simon says there is every intention to have this full value for it.

This is not a distress or fire sale, and it's not the only lever we have.

So I am indeed quite confident that the financial framework will stand that test over the next few years, as well.

Thanks, Biraj.

Can I ask the operator if there is a next question?

Our next question comes from Irene Himona of SGS.

Thank you.

Good afternoon, gentlemen.

On slides 29 &and 30, you show the split of cost cutting during upstream and downstream.

You show 1.7 upstream, 1.6 downstream.

I presume these reconcile to the $4 billion of oil reduction.

But clearly, relative to the smaller size of the downstream business, it seems that the cost cutting was much more intense there.

And I know over the years, downstream free cash flow was around $7 billion.

Actually, it paid 80% of your cash dividend cost.

So I had two related questions.

Firstly, do you see this balance of costs between up and downstream changing after BG?

Do you expect more of the $3 billion targeted cost cutting this year from the upstream?

And then secondly, given those quite intense, obviously, downstream cost reductions, are you maintaining the targeted 10% to12% normalized return at mid cycle margins, or do you think the portfolio can actually do better than that, which is material in an environment of margins coming off some pretty record levels last year?

Thank you.

Thanks, Irene.

Let me just give you one clarification.

The $3 billion that we talk about is legacy Shell cost.

We do not know in great detail, of course, what the cost structure makeup and allocation is within the BG portfolio.

So that will only come a little bit later.

What we do, of course, know is that there is synergies between these two that can be added on top of that $3 billion.

Then of course, there will be quite a few moving parts, because these synergies will also come with some one-off charges.

So it will be, I'm afraid, in this transition year, a few puts and takes, and we will try to explain it as best as we can as the year goes on.

But $3 billion is number we talk to on the Shell side of the ledger.

Simon, do you want to talk a little bit more about these waterfalls that we have in chart 29 and 30?

Sure.

Actually, you're right, Irene, that the performance -- and this is a net performance, remember, in 2015 -- looks better in the downstream than the upstream.

Remember, this is all-in.

It includes a bit of FX, and the FX was more of a contributor in downstream than the upstream, but it also includes the one-offs, and the one-offs were more heavily in the upstream than the downstream.

So in terms of underlying improvements, it's about $3 billion like-for-like, and that was in 2015 and that's the figure for 2016.

In practice, it is loaded towards the upstream in 2016, and that's just about the phasing of the programs that I talked about earlier, that a lot of good ground work done in the upstream in 2015, but it should start to make more of a difference and therefore, proportionately higher contribution in 2016.

And of course, any synergies or other improvements in the BG combination would also appear in the upstream.

So in terms of performance improvement, the upstream has the greater potential, in that sense.

And the 10% to 12%, I think we had a good year last year in downstream.

That's fair to say.

We saw better refining margins.

But we've learned in the past, you need to take advantage of those margins.

In 2015, we did capture the margins, and a little bit more, following some of the changes we made, or that Ben made actually, to the way we managed the value chain in the downstream back in 2012-13.

So that's a structural improvement.

That was always intended to support the 10% expectation or, in fact, the $10 billion of cash flow from ops that the downstream is expected to make through cycle.

No change at all to the strategic intent or the capability of the portfolio.

I think what last year has taught you was a greater confidence in delivery in a more challenging environment, because last year was relatively benign.

We don't know where it's going to be today, but we're sure we're in a much better place to capture what margin is available in the markets, not just in refining, but in the marketing businesses, as well.

If there is any update, if there's something other, I think it will come out later in the year.

Thanks, Simon.

Thanks, Irene.

Operator, can I have the next question, please?

Certainly.

Our next question comes from Christopher Kuplent of Bank of America Merrill Lynch.

Thank you.

I'll keep it to just one question.

Just wanted to ask whether there is a particular reason why you, in your presentation, Ben, dropped the reference to future ambitions regarding share buybacks, just wanted to see where your head is on that topic at the moment, and particularly how you're thinking about continuing with the script going forward, maybe linked to oil prices or not?

Thank you.

Thanks, Chris.

Don't read anything in the fact that it wasn't on the slide.

It is there.

We will do it.

There's quite a few other commitment and statements that we made in the original 2.7 and in the prospectus that were not on that particular slide.

The entire package of commitments and promises is still completely intact.

Thank you.

Okay.

Operator, can I have the next question please?

Our next question comes from Iain Reid of Macquarie.

Hello, gentlemen.

Ben, just coming back on the previous question in terms of commitments, et cetera, I've noticed on the dividend, you call that an intention rather than a commitment.

And I wonder whether you're prepared to reiterate that even if oil prices remain at this level, you still intend, on oil commits, perhaps better, to pay a similar level of dividends, say, in 12 months time as you're paying today?

And on the second question, just interested on the start-up date you've got on your project, that slide there.

As a prelude going back, you're now showing it as a 2018-plus project.

It wasn't that long ago when you were telling us that 2016 was more likely start-up date.

Thanks, Iain.

On dividend, really no change.

No change in the commitments that we've made.

We've said we underwrite the dividend for seven quarters in a row.

$1.88 for last year; at least that for this year.

There was no change to that.

And in terms of our overall dividend policy after this year, also no change to the dividend policy that we had before.

So don't read anything in it.

There is, in that sense, no change from our promises that we made, as well as no change from the way we have approached the dividend in the past.

We understand the importance of the dividend.

We understand our own capacity to pay the dividend.

And therefore, there is no change in whatever it is that we have said before.

On Prelude, we always said material cash in 2018, and that is pretty much what we are saying today, so also there, no real change.

Okay.

Thanks, Iain.

Can I have the next question, please?

Our next question comes from Gordon Gray of HSBC.

Thanks.

Good afternoon, gentlemen.

It's a downstream question, actually.

You've been through a process of rationalizing part of your downstream business, pushing through capital efficiency.

My question is, if I look at your slide on CapEx, it looks like, in rough terms, you're planning to spend about $7 billion across the whole downstream business, which compares to a long run history of more like $5 billion.

So maybe you can let us know how much of that increase is maybe dependent on the FID in Pennsylvania and/or what else is leading to what looks like an underlying increase in investment in the downstream?

Thanks, Gordon.

Indeed, the downstream typically has, by and large, its capital budget made up of stay-in business CapEx, so rather hard asset integrity-type CapEx turn around that we capitalize catalyst change that we capitalize, and then of course, a whole raft of small projects that are basically also there to defend value.

So it is continuing to invest in our retail network.

It is continuing to invest in our lubricant blending plants, refineries chemical plants.

So just basically stand still or to capture a little bit of value here and there by debottlenecking, et cetera.

If you add all of that up and if you add on top of that a little bit of value growth, you do indeed come to about $5 billion.

Sometimes there is slightly bigger projects in there, like $80 million, $100 million,$200 million projects.

But by and large, it's made up of much smaller projects.

Now we have in there a few opportunities to invest in very advantaged projects.

They are predominantly in petrochemicals.

So you mentioned one, the Pennsylvania cracker.

There's another one we are working on, which is the expansion of the non-high complex in [Quanto].

There's other opportunities that we have just taken FID on in the Gulf of Mexico, again on the basis of very strong advantage that we already enjoy also on a very strong foundation that we have built over the last years.

And therefore, you'll see a little bit more value growth in that portfolio going forward, depending a little bit on what we will do with some of these projects that will indeed come up for investment decision, you will see a step up in spend in the downstream, predominantly really in petrochemicals, although there are a few strong refining projects that we have taken on, as well.

Earlier in 2015, we took an investment decision on a hydrocracker debottlenecking in Scotsford, a project that blows the lights out in terms of their returns, simply because again the advantage position that that refinery has, upgrading further synthetic crude.

We are going to invest in earnest, again, a modest investment in terms of absolute capital numbers, but it's going to significantly improve the crude flexibility, because we are going to open up the operating window to take heavy crudes for heavy conversion.

So very efficient investment.

And there will be more of these things that we are now confident to do, because we know that we have broad asset base, back to an asset base that is structurally sound and fundamentally advantaged, provided, indeed, we put the investment in there to capture the advantage.

So a little bit of growth in the downstream, in my mind, is the sensible thing to do.

And it also doesn't sit badly next to, of course, a major growth spurt that we will have taken in expanding our upstream capital with the BG acquisition.

Okay.

That's great.

Thank you.

Thanks, Gordon.

Can I have the next question, please?

Our next question comes from Bert van Hoogenhuyze of Stroeve.

Hello.

Good afternoon, gentlemen.

Two questions.

First, your working capital has been reduced by $1.6 billion.

And in view of the things you said about suppliers showing more receptiveness on the one hand, on the other hand, of course, some suppliers are maybe more or less on the brink of bankruptcy, so the ability to suffer more cost reductions is probably limited.

In that respect, what do you expect further working capital reduction in the same bracket for the coming quarters?

That's the first question.

And the second question was, I was a little bit surprised by the number, the gas prices you made in Asia.

Does this mean indeed contract prices are adapting much faster than previously thought with the lower oil prices?

Thanks very much, Bert.

Let me make a few comments on the first question and then ask Simon to complete it and take the next one.

You're absolutely right that we need to be -- we need to take a long-term view on how we deal with the supply chain.

So again, as I said earlier on, this is not a matter of taking all our competitive weight in the current environment that we have and put more pressure on our suppliers, because ultimately we suffer from that, as well, either because it will quickly bounce back because it is temporal, or more fundamentally, we basically destroy capability that we all desperately need again when the oil price swings up and we will all be wanting to pursue a more aggressive growth path, as an industry.

So therefore, the need to really work together with our supply chain partners to come up with more structural solutions.

Working capital reduction will remain an important focus.

But it's not just working capital reduction, looking at accounts payable and receivable.

It's also working on stocks, and there is still more we can do there, particularly in the non-trading area.

There are still areas where we can bring inventory levels down in the supply chain by operating more efficiently.

Simon referred earlier on to the fact we have been changing the operating model in the downstream, where a lot of our work and capital sits in oil and product stocks.

Basically, we take advantage of our trading capability to really optimize the supply chains.

And then on top of it, we trade around these supply chains.

There is more we can do to do that with a lower inventory level, in general.

But we have to be careful that we do not take out too much working capital, because actually our trading model, of course, relies on making a return on working capital.

So too much working capital reduction basically also takes the resource away to make money with.

But in the main, I would expect that to be further areas for us to have those working capital reductions also in 2016.

Simon?

On the gas price movement, remember in the LNG market, 85% of our sales are linked to long-term contracts, and within that, probably around 70% is directly linked to oil, or 70 of the 100.

So there's a very close relationship, with some time lag, sometimes three to six months time lag.

And I think the prices have pretty much followed that route.

Some of the realized prices that we report in the supplementary information actually are not linked to LNG.

They are domestic gas prices.

So they don't necessarily fall as far as the oil price has gone, or in fact, with the same phasing.

So gas pricing is quite a mix over a period and is rather less sensitive overall than the oil production to price movements, because of the different elements.

I can't say too much more about that on specific prices, other that than as we integrate BG, some of these dynamics will change and we'll need to be more helpful in terms of guiding as to what the impact of changes that you can see could be on the performance of the Company.

Thanks, Simon.

Thanks, Bert.

Operator, can I have the next question?

Our final question comes from David [Gambolla] of [TPH].

Thanks.

Good afternoon.

I have two questions, please.

One on the downstream side of things, so looking at Q4 cash flow in the downstream, it was quite weak, excluding working capital benefits, something that you just recently talked about.

I'm wondering if you could provide some color around if we stay at current refining and pet chem margin levels, what is the cash flow expected in 2016 from chemicals and downstream?

I appreciate we will get more visibility on this when you change your reporting structure, but if you could provide a bit of color on the 2016 development of the downstream cash flow.

And on the CapEx side of things, could you break down out of the $33 billion how much is going into the upstream base spend and what is your expected underlying managed decline rate, taking into account BG?

Thank you.

Thank you, David.

Simon, why don't you take them?

Sure.

Q4 cash flow, you generally don't need to just look at the working cap, you need to put an adjustment for the cost of sales adjustment, as well, for any short-term period, in terms of if you like cleaning up the difference between cash flow reported and the earnings.

And I think the differential is maybe not so high, if you look at it in that sense.

The go forward, by and large, cash from ops tracks earnings in the downstream, other than working capital on the inventory, the total inventory, for sake of argument, is roughly 100 million barrels that's impacted.

And it's relatively easy, therefore, to use the average price in the last month of the quarter to approximate what the working capital impact on inventory is.

So that may be helpful.

Upstream CapEx, it's not a bright line cutoff between asset integrity care and maintenance.

The small projects has been running around the $8 billion to $9 billion level.

It's coming down, I think it's fair to say, over time, partly because of the nature of the portfolio is changing, on average, becoming a less mature portfolio, because we've been divesting assets, or actually just decommissioning some of the older assets, or taking a significant demand costs out of that activity, such as in the North Sea.

The decline rate, typically it's been, and we would always state, absent new investment, 4% to 5% across the portfolio, but that varies.

It can be 15% in deepwater.

It can be close to zero on an LNG project.

As BG comes in, I reserve judgment until we actually have the numbers, but the key parts of their portfolio, if it's LNG, for example, in Australia, while you have to keep drilling, it's technically decline free.

And in Brazil, many of the individual wells are almost decline free.

So at least in principal, to be confirmed in practice, the BG portfolio is on average is less mature and less declined than the Shell portfolio.

So it should help our average decline rate.

As I say, we talk about 4% to 5%.

In practice, it's been closer to 4% recently, and one would hope that we'll see that reduce a little further as we go forward.

It will also be helped by the nature of some of our own Shell projects coming on stream, such as [Gorgen, Katchigan], and the North Sea project, Trans Galleon, all of which are long life assets which help stem the decline rate.

Okay.

Thanks, Simon.

David, thank you very much.

And thank you all for your questions and indeed for joining the call today.

So we'll have first quarter results, they are scheduled to be announced on the 4th of May; and then as has been already mentioned a few times earlier in this call, we will have a Capital Markets Day on the 7th of June, as well.

And then, of course, Simon and myself and other members of the executive team will be there and we'll all be looking forward to talking to you by then.

So thank you very much.

Have a good day.