殼牌 (SHEL) 2018 Q3 法說會逐字稿

Welcome to the Royal Dutch Shell 2018 Q3 announcement.

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

(Operator Instructions)

As a reminder, today's conference is being recorded and I would like to introduce the first speaker, Mrs.

Jessica Uhl.

Please, go ahead.

Thank you.

Ladies and gentlemen, welcome to the Shell Third Quarter 2018 Results Call.

Before we start, let me highlight the disclaimer statement.

In 2016, we made a set of commitments to strengthen our balance sheet and increase shareholder returns.

With today's results, we demonstrate that we're continuing to deliver on these commitments.

I would like to update you on our progress and I will start with the results from this quarter.

Shell's cash flow from operations, excluding working capital movements in the quarter, was $14.7 billion, making Q3 one of our strongest ever.

Free cash flow was $8 billion.

Our strong financial performance allowed us to cover the full cash dividend, interest payments, share buybacks and to further pay down debt.

We remain committed to pulling levers necessary to complete the $25 billion share buyback program by the end of 2020.

We bought back over 60 million shares for a total of $2 billion.

This completes the first tranche of our program.

And I'm pleased to announce that we will initiate the next tranche from today with our commitment to purchase up to $2.5 billion of additional shares.

As we deliver on the buyback program, we also continued to reduce net debt.

We reduced our gearing from 23.6% to 23.1% during the quarter, and we have line of sight to 20% gearing.

And we continue to optimize our portfolio.

Our $30 billion divestment program, new project delivery and a disciplined approach to capital allocation has reset the cash flow profile and resilience of our portfolio.

Our strategic ambition to reduce the net carbon footprint of our energy products is important in supporting our license to operate and for us to thrive through the energy transition.

In September, Shell announced a target to maintain methane emissions intensity below 0.2% by 2025 for oil and gas assets where Shell is the operator.

This further demonstrates our continued focus on tackling greenhouse gas emissions.

But before I reflect further on our third quarter results, let me first take you through the portfolio highlights from the quarter.

We gave the green light to invest in LNG Canada at the beginning of October.

This is the first LNG project on the West Coast of North America, and Shell has a 40% working interest.

LNG demand is expected to double by 2035.

LNG Canada shows the confidence we have in the future of natural gas and LNG.

This project is perfectly located to meet the growing demand with low cost natural gas from British Columbia.

This is especially true for customers in Asia.

It is also due to come onstream at a time when we expect a global LNG supply shortage.

Construction has already begun and we expect to produce first LNG before the middle of the next decade.

As with all of our major investment decisions, we took a disciplined approach to improving the competitiveness of the project before we made the final investment decision.

It has a strong and resilient cash flow profile.

Shell also has significant integration advantages from the Upstream through trading.

Both of these aspects of the project contribute to achieving an internal rate of return of around 13% at a price of $8.50 per MMBtu at real terms 2018 delivered in Japan.

And if we decide to proceed with trains 3 and 4 together with the other joint venture partners, this expansion would provide further upside to project economics.

LNG Canada is an important contribution to our strategy to be a world-class investment case.

The project also needs to be aligned with our strategic ambition of thriving through the energy transition to a lower carbon world.

LNG Canada is designed to achieve the lowest carbon intensity of any large LNG plant in operation today.

This is consistent with the ambition we announced last year, to reduce the net carbon footprint of the energy products we sell.

The LNG supplied by this project can help to improve air quality in Asia by replacing more polluting coal.

LNG Canada also fits with our third strategic ambition, maintaining a strong societal license to operate.

We carefully planned LNG Canada, working closely with local communities, First Nations and governments to ensure we are a good neighbor from the start.

LNG Canada is a great opportunity for Shell, offering a competitive cost of supply, resilient cash flows and returns and is a strong fit to our overall strategy.

We firmly believe LNG Canada is the right project in the right place at the right time.

Let me now turn to the portfolio progress made across the other areas of our business during the third quarter.

In Nigeria, we made a significant near-field gas discovery in the Epu field.

In Brazil, we added a material operated exploration position with the Saturno pre-salt block in the Santos Basin.

This increases our offshore acreage in Brazil to approximately 2.7 million acres and adds to our leading portfolio in one of the world's most prolific deep water areas.

In our exploration portfolio, we signed contracts with the Government of Mauritania for the exploration and potential future development of 2 offshore blocks.

In addition to developing these blocks, Shell and the Government of Mauritania are also exploring new ways to meet the country's domestic energy needs and build capability in its energy sector.

In Brazil, we announced the startup of our P69 floating production storage and offloading facility, or FPSO, at Lula Extreme South.

In Downstream, the Pernis refinery saw the startup of its new solvent deasphalter.

This is designed to enhance the performance and competitiveness of the refinery.

It is another project that supports Shell's ambition to thrive in the energy transition.

The cleaner transport fuels this refinery is now able to produce allows us to provide low sulfur products, including marine gas oil, compliant with the stricter emission standards from the International Maritime Organization from the 1st of January 2020.

In October, we delivered our first ship-to-ship bunkering of cleaner burning LNG fuel from a specialized LNG bunker vessel.

You would have seen a picture of this on the opening slide.

LNG for transport in general and LNG for shipping in particular is an exciting market that we expect to expand.

The global market for LNG as a fuel for transport is around 14 million tonnes per annum.

We expect this to grow more than fourfold by 2030.

In October, we completed the sale of Shell's Downstream business in Argentina to Raízen.

Shell also announced the sale of our Upstream interest in Denmark to Norco for $1.9 billion.

These sales are consistent with Shell's strategy of simplifying and reshaping our portfolio through a $30 billion divestment program.

Let's now go deeper into the Q3 financial highlights.

Cash generation, returns and disciplined cash allocation are all key contributors to a world-class investment case.

Let us look at each of these.

Shell's good operational delivery produced one of our strongest ever quarters.

As I've already mentioned, cash flow from operations, excluding working capital movements, was $14.7 billion in the quarter.

This is at an average Brent price of around $75 per barrel.

Our organic free cash flow for the quarter was $7.5 billion.

This means free cash flow more than covered the full cash dividend, interest and share buybacks for this quarter.

At the end of Q3 2018, current cost of supplies earnings, excluding identified items, amounted to more than $5.6 billion.

This resulted in a return on average capital employed of 7.1%, which is 2.5% points higher than in Q3 2017.

We are confident this will continue to improve towards our outlook of 10% in 2020.

As already highlighted, we have reduced our gearing to 23.1%, with a net debt reduction for the quarter of $1.7 billion.

And we've completed the first tranche of share buybacks with the second tranche of up to $2.5 billion announced today.

Our capital investment this quarter was $5.8 billion.

We estimate our full year spend to be around $25 billion.

We will continue to take a very disciplined approach to capital allocation to ensure we have competitive, affordable, incredible returns from our investments.

Let us have a closer look at our earnings this quarter.

Our Q3 2018 CCS earnings, excluding identified items, amounted to $5.6 billion, which is $1.5 billion or 37% higher than in Q3 2017.

Earnings, excluding identified items, in Upstream were more than 3x or $1.3 billion higher than in Q3 2017.

This reflects higher oil and gas prices as well as lower depreciation.

Earnings, excluding identified items, also includes a provision for unitization settlements related to pre-salt assets in Brazil, partially offset by other impacts.

Further, the movements in tax include changes in deferred tax positions, largely arising from changes in the Upstream fiscal regime in Brazil.

The net impact of these items was around $0.4 billion.

Excluding portfolio impacts, production was up 4% over the same period.

In our Integrated Gas business, earnings excluding identified items, increased by $1 billion or 79% compared to Q3 2017.

Integrated Gas benefited from higher realized oil, gas and LNG prices as well as higher trading margins from LNG cargo diversion.

In Downstream, CCS earnings, excluding identified items, were $0.7 billion or 25% lower than in Q3 2017, largely due to lower margins in 2018.

Now let us have a look in some more detail at cash flow.

Our Q3 2018 cash flow from operations, excluding working capital movements, amounted to $14.7 billion, which is $3.1 billion or 26% higher than in Q2 2018.

In the quarter, $1.2 billion of the increase in cash flow reflects higher realized oil and gas prices in Upstream and higher production, largely as a result of good performance in the Gulf of Mexico.

Cash tax payments in Q1 and Q3 are generally lower than the current tax charged to earnings due to the payment scheduling with Q2 and Q4 historically being higher.

In Q3 2018, this resulted in a $0.8 billion benefit to cash when compared to Q2 2018.

Margining.

With upward movements in the oil price forward curve, we've been subject to margin calls in our hedging program in Integrated Gas over the last 12 months with a net impact of $7.5 billion in Q2 2018.

However, in Q3 2018, there were no material impacts to margining as our Brent and Henry Hub exposures largely offset each other in the quarter and therefore, a positive impact relative to Q2.

The remaining variance of $0.6 billion was largely due to realized gains on foreign exchange swaps.

Next, I want to provide more detail on our working capital movements.

Increases in oil price have an impact on working capital through our inventories of crude end products that support our operations and trading activities.

The impact on working capital in this period is largely inventory volume-driven as a result of underlying movements supporting normal business operations.

The largest components of our inventories sit within our Downstream and trading businesses.

Since Q2 2018, normal business operations caused a number of barrels that Downstream kept in its inventory to increase some 15 million barrels from 290 million to around 305 million barrels.

This is the same level as in Q3 2017.

Across the same period with average prices increasing around 30%, we have seen a corresponding increase to our inventory value.

An example of inventory levels driven by business operations is with our Bukom refinery, which restocked ahead its recent return to service from its turnaround, making inventory levels higher.

Also in Integrated Gas, gas inventories increased ahead of peak season demand in winter months.

Further information can be found in one of the slides in the appendix.

I would like to take a slightly longer perspective by looking at our financial performance on a 4-quarter rolling basis.

At an average oil price of $69 per barrel, CCS earnings, excluding identified items, amounted to $20 billion.

The return on average capital employed for these earnings was 7.1% and is expected to continue to improve as we start up new projects and improve performance and capital efficiency.

We are on track for a 10% return on average capital employed in 2020.

On a 4-quarter rolling basis, we've generated some $29 billion of free cash flow, including around $13 billion of cash proceeds from divestments.

We are on track for our 2020 cash flow outlook.

And finally, we are making progress on our net debt with an $8.3 billion reduction since Q3 2017 with gearing reduced to 23.1% from 25.7%.

We are on track towards a gearing of 20%.

Now I'd like to show you how we are continuing to improve the company.

Our focus on cost reduction and efficiency gains remains unchanged.

We will do this through simplification, standardization and digitalization.

Machine learning and advanced analytics can help improve our predictive maintenance capability and identify equipment at risk of failing.

For example, it can help us see weak signals and act before trip occurs in our compressors, therefore preventing associated production losses and reducing maintenance costs.

We are already delivering these benefits in some of our Upstream assets and are pursuing replication across the portfolio.

Shell is also broadening its strategic collaboration with Microsoft to accelerate industry transformation and innovation.

As part of this, Shell has selected C3 IoT with Microsoft Azure as its artificial intelligence platform.

Shell expects to realize substantial economic value by rapidly scaling and replicating artificial intelligence and machine learning applications, and the collaboration with Microsoft gives us a solid digital platform to make our core business more effective and efficient.

On divestments.

We've completed and announced the sale of more than $30 billion of assets as part of our divestment program.

Cash proceeds for this program total around $27 billion to date.

We expect further divestments in 2019 and 2020 of around $5 billion per year as we continue to reshape our business.

We've also been consistent with our strategy on capital investment.

We are confident our investments will support growth and we see potential to further improve capital efficiency.

As I've said before, you should expect our 2018 capital investment to be around $25 billion.

For 2019, we will maintain the range of $25 billion to $30 billion for capital investment.

Our projects delivered since 2014 and are expected to generate $10 billion of additional cash flow from operations by the end of 2018 and $15 billion by the end of 2020 at $60 per barrel real terms 2016.

As at Q3 2018 year-to-date, these new projects at current prices contributed some $9 billion of cash flow from operations.

And at $60 per barrel real terms 2016, this would be equivalent to around $7.5 billion.

Let us now have a look at our project delivery in more detail and how these projects contributes through to 2020.

We have many new projects that will deliver material cash flows from now until well into the 2020s.

As you can see on the slide, most of these projects are already producing while others are ramping up towards peak production.

Examples include recent additions I've already mentioned like our FPSO facility P69 in Brazil and the solvent deasphalter in Pernis.

We are also on track to start production at Prelude, a floating liquefied natural gas facility in Australia, around year end.

And in Brazil, we are adding production from 3 more new FPSO facilities, 1 before the end of the year and then 2 more next year.

Also, Appomattox, our deep water oil and gas project in the Gulf of Mexico is expected to start up in 2019.

In addition to these selected key projects on the slide, there's a list of further projects included in the appendix.

I would now like to bring together what I've told you about our financial performance to date, the progress on our 4 levers, in particular, our new projects, and show you how this connects to our 2020 outlook.

On a 4-quarter rolling basis, we've generated $24 billion of organic free cash flow at $69 per barrel.

This is adjusted for around $7 billion of working capital movement and Integrated Gas margining.

To keep a consistent view, we present all data on a $60 per barrel real term 2016 basis.

This would mean a reduction in the organic free cash flow of about $3 billion to our 4-quarter rolling organic free cash flow.

At this oil price, assuming a stable price environment, we would not have been subject to the margin calls or working capital movements as we have to date.

So against this lower oil price of $60 per barrel, our cash flow would have been around $21 billion.

Taking into account the additional cash flow expected from new projects of more than $7 billion, we expect to see organic free cash flow within the range of $25 billion to $30 billion.

Even if prices increase, our financial framework remains as disciplined as before.

Our cash flow priorities are unchanged.

Firstly, we use proceeds from divestments to reduce debt.

Secondly, through the cycle, dividend, net interest payments and capital investment should all be covered by cash flow from operations.

Excess cash flow will be partly used to reduce our debt further and partly distributed to shareholders.

Considering specifically our share buyback program, we've announced a second tranche of up to $2.5 billion.

This tranche is in line with our intention to purchase $25 billion of our shares by the end of 2020.

The pace of this program continues to depend on oil price and our progress on debt reduction.

Let me return to where I started.

We remain committed to our financial framework.

Our cash flow outlook is strong, we have a focus on capital discipline and capital allocation.

With our performance track record and our cash generation outlook, Shell's on track to deliver on our commitments.

With that, let's go for your questions, please.

(Operator Instructions)

(Operator Instructions) And we will take our first question from Christyan Malek with JPMorgan.

So 2 questions, if I may.

The first is regarding what appears to be an ongoing dislocation between cash flow and earnings and partly through the noncash charges in the Upstream as you see high oil prices.

Jessica, is there any way you can guide more proactively on noncash and working capital movements from quarter-to-quarter in order to better reconcile earnings and cash variances?

And I know you helped to explain this through the summary, but just what I'm trying to get my head around is how cash flow can vary so much from one quarter to the next more than any of your comparable peers despite a fairly muted macro environment over the same time period.

And maybe that's to do with sensitivity on a dollar per barrel movement to the cash flow.

The second question is it's great to see your new transition targets front and center of quarterly slides.

And I was wondering if you can expand on how you and the management solve for investing in New Energies and lowering new carbon footprint while maintaining your rate of return that's competitive in, at least, the oil and gas business.

It just strikes me that those 2 things don't really work hand-in-hand.

Thank you, Christyan, for the questions.

We have framed our strategy, our financial framework and our commitments around cash flow, and we've done that for a reason.

We think it's, frankly, the more transparent way of understanding the underlying performance of the business.

A company with our scale and scope and operating in 70-plus countries can be subject to relatively unique or one-off accounting and reporting matters, which you see in our results from time to time.

And then certainly, it's the case in this quarter as well.

As you mentioned, the change in REPETRO legislation, the unitization impact in Brazil were significant.

That impacted earnings by some $400 million for the quarter.

And those are in our clean earnings.

So a part of this is a bit of the nature of our business.

And Christyan, we're doing -- we are looking hard in terms of ensuring we provide adequate disclosure to the market and certainly want to have the highest level of transparency that's appropriate in terms of what to expect from the business.

But we've been very clear in terms of focusing on cash.

And if you look over the last 2 years, I think we've produced more cash than anybody else in the sector and that, that cash flow trajectory has been increasing steadily over time.

We've provided in the materials insight in terms of going from Q2 to Q3, what brought that $3 billion step-up in cash.

First of all, it's underlying performance of the business, increased production in the Gulf of Mexico.

We've had a very strong focus on the growth agenda in the company on our new projects.

Again, you see that coming through in our cash flow in Q3 and providing transparency in terms of what more to expect over the next year, 1.5 years, as more projects come on stream and contribute to a further $7 billion in CFFO and free cash flow over the next 2 years.

I think I'll leave it at that.

Again, focus on the cash.

We're clear in terms of our commitment of $25 billion to $30 billion organic free cash flow by 2020, and I think we're trying to be very transparent in terms of how you get to our cash generation today and getting to that 2020 number of $25 billion in the next 2 years.

In terms of the energy transition and our ambition to lead to the energy transition, indeed that's why we set up the New Energies business and again, introduced the net carbon footprint approach and how we think we need to manage the company and help lead to the energy transition.

A couple of things.

We've made a number of investments and those investments we're targeting returns of some 8% to 12%.

And some of those investments, we've been able to achieve that from an equity return perspective.

So not all of these investments necessarily are achieving low returns, and some of them can be quite competitive and attractive returns.

And of course, that's what we're pursuing every time we make an acquisition.

I think what's important to keep in mind is we're trying to build new business models, we're trying to leverage capability we have in the company, we're trying to create integrated value chains in the power sector where we think through time, we can create very competitive returns.

So we don't want this to be at odds with the cash generation we need to deliver the company, the return profile we need to generate for our shareholders.

We're doing it somewhat modestly from a Shell perspective with our investment levels of $1 billion to $2 billion.

So that should not get in the way of our achieving the returns and cash generation we need to meet the commitments to the market.

So I think we're finding the right balance between building capabilities, building new business models while ensuring we're providing the right level of cash and returns to our shareholders today.

And our next question comes from Lydia Rainforth from Barclays.

Jessica, a couple of questions if I could.

Thank you for giving that first chart on the free cash flow out to 2020.

Can I just check the -- if I'm thinking about the rolling 12 months that we've just had, the CapEx number has been below that level of the $25 billion at the low end.

If I start taking the top end of that CapEx guidance, does the -- you actually are going to a slightly lower number than that $25 billion to $30 billion organic free cash flow number.

Is that the right -- am I doing the math right on that?

And then secondly as you had talked about the digitalization program and you talked about substantial economic benefit.

Is there an actual sort of number that you're thinking about then of kind of what the substantial actually mean?

Great.

Thank you, Lydia.

And thank you for your diligence on the free cash flow numbers and making sure that we're not kind of missing something.

There are various ins and outs.

We're trying to provide the most kind of material movements and transparency.

But indeed, when thinking about the CapEx level we've had to date, they are trending lower.

That adjustment has been made.

So we've normalized in the calculation to reflect the expectation of CapEx around $25 billion.

So we could walk it through in more detail for all the various ins and outs, but that has been recognized in the numbers and so you still end up in the same place of the $21 billion plus $7 billion that's in the chart.

In the -- for digitalization, we think there is a tremendous amount of value in this space.

Of course -- and I would safely say that for us, it could be in the billions of dollars, and we are treating it with that level of seriousness and expectation in the organization and bringing that level of management focus to it.

But of course, we want to prove it to ourselves and demonstrate it and have it come through our numbers before we start putting any kind of firm numbers out.

But indeed I think there is a material potential and opportunity for us with digitalization that we're just starting to realize now.

And we will take our next question from Michele Della Vigna from Goldman Sachs.

It's Michele here.

I have 2 questions if I may.

The first one is about IFRS 16 and the impact that you estimate is going to have on your accounts in 2019 and particularly if you would then adjust to 20% gearing target according to how the new accounting would change your reporting of the net debt.

And in the second one, staying on the subject of clean energy, I was wondering, you completed the First Utility acquisition in February.

I was wondering what do you have discovered since then in terms of your ability to build a larger customer base there and the profitability of the business in the first month that you've consolidated it.

Right.

Thank you, Michele.

IFRS 16 is a substantial change in accounting and we're working that hard in the organization to set up for implementation at the beginning of next year.

As most of you are aware, if not all of you are aware, it will affect the P&L, the cash flow and the balance sheet, and we will provide more insight on the magnitude of the impact in the first quarter.

What we'll do for 2019 is to continue to report our metrics, our key metrics, and certainly those that we've tied commitments to on both bases.

So it will be both on how we currently account for things and then under IFRS 16 to show that line of sight between our original targets and the original way things were accounted for.

And then, thinking about potential change to the metrics, we're going to leave that to MD, our Management Day 2019 in June.

Well, we think that's the right opportunity to reset these things.

But indeed, we're maintaining our commitments to our -- to the financial metrics as we've set them out previously and we'll provide transparency on both bases next year to make sure that it's clear.

We remain committed and we will achieve the commitments as we set them out.

In terms of Clean Energy and First Utility, we're pleased with the acquisition and the integration.

We have the CEO of First Utility, Colin Crooks, with us a few weeks ago, going through the performance of the company.

I'd say overall, we're very pleased.

We think there's actually a lot of opportunity for Shell to bring value to the business.

And from an integrated perspective, working with our trading business, we saw some of that upfront.

We continue to believe that's the case.

We believe there is going to be further synergy across our customer base and working with our retail business.

So the original strategy and premise that we had, we believe remains valid.

Of course, it's very early days.

It's only been, I think less than a year that we've had First Utility.

But indeed, we think it's a good platform for us to start developing new business models, looking for ways to thrill our customers and provide a better power service to our customers in the U.K.

And our next question comes from Jon Rigby from UBS.

Jessica, 2 questions.

The first is on Integrated Gas.

It looks to me and maybe it's just issue of my modeling.

But the third quarter results looks like you may have under-earned a little bit, and I just wondered whether that was a function of some stellar historic performance in the first few quarters of this year, leveraged off the LNG market or whether it was particular issues in the quarter, which are somewhat temporary and may reverse.

And I say that in the context of what looks like a good LNG earnings quarter for some of your peers as well.

And obviously, you're the leading player.

So I just wondered whether you were able to sort of lift the lid a little bit on IG and maybe sort of flag up any issues that we ought to be aware of.

The second just is, so it's very picky on.

On Brazil, obviously we had an election and the real has strengthened again.

So given that it looks like real weakness as being a driver of some of the deferred tax changes, the noncash ones that are sort of, as referenced earlier, have annoyed a lot of people in terms of creating a bit of noise around your numbers.

Is it potentially the case that if the real stays where it is, is you'll see some positive adjustments flowing back through Upstream in 4Q?

Thank you, Jon.

Integrated Gas overall has continued to perform very strongly over the last year, let alone, the last quarter.

It's been a very good performance from our trading organization and the optimization we've been able to achieve with our portfolio, our shipping and our trading capability.

And those numbers continue to come through.

I think we have tried to hint in prior quarters that we didn't want that to become kind of the new normal, but they continued to perform very, very well and frankly, a bit above our own expectations.

So I think there is a bit of over-delivery in the last couple of quarters that perhaps people are thinking that will always happen.

I think it's been just a very, very good performance from our trading organization in optimization of our LNG portfolio, which they continue to do going into Q3 as well.

Indeed, within the business, however, there was some maintenance that took place in the third quarter that did affect production, and you see that in the production numbers of the business in Pearl and in Sakhalin.

There was maintenance issues.

And that contributed to the somewhat lower production levels that also flowed through in terms of cash flow for the quarter.

So it's those elements, a little -- production is somewhat soft because of some maintenance activities that is not steady-state.

Trade business making up for some of that, if not most of that, and that's probably slightly high performance.

But I'd be more than happy if that did become the new normal and we're certainly encouraging the business for that to be the new normal.

But I would recognize that they've had some pretty exceptional trading circumstances that they've been able to take advantage of.

Brazil and the FX movements indeed, given our position in Brazil, the largest IOC in the sector, a very important position for us.

Movements in foreign currency do often flow-through, do have an impact on our P&L and you've seen that in the past.

Jon, I wouldn't want to provide just an offhand rule of thumb of what to expect because there are a lot of moving parts.

This quarter, what happened was more around the impact of the change in the REPETRO legislation that was what drove the impact for deferred tax liabilities, and that's entirely noncash movements.

So I think I would like to provide upfront to the market more insight in terms of what to expect when foreign currencies move.

It's a real challenge just given the scale and scope of our business.

But happy to try and provide more insight kind of off-line, if that's helpful.

And our next question comes from Martijn Rats from Morgan Stanley.

Jessica, I've got 2, if I may.

I -- first of all, I wanted to you ask about the CapEx.

I noticed that on your slides, CapEx is formulated at $25 billion to $30 billion until 2020.

And until very recently, the labeling was usually 2019 to 2021.

Now I don't want to read too much into this, but I was wondering if there's any sort of change there, and if this reflects the idea that perhaps by 2021, the guided CapEx range might not be entirely applicable anymore.

And the second thing I wanted to ask you about related to the North Sea.

I noticed that your North Sea operations, you recently went from -- sort of shift schedule, it went from 3 weeks onshore, 4 weeks offshore; to now 3 weeks onshore, 2 weeks offshore, effectively halving the time offshore per week spent onshore.

And that -- I'll be honest, that sounds like a relatively expensive move.

And Total, for example, went right the other way.

I was wondering if you could talk a little bit about why you've put this through and what the thinking is behind it and what it does to your operating cost.

Great.

Thank you, Martijn.

On CapEx, there was no intention to send a signal of a change of intent or expectations on our capital investment going through to 2021.

So I think that was just a -- just happened to be how that number showed up.

So there's no signaling.

We continue to believe $25 billion to $30 billion allows us to achieve our strategy, grow the value of the company, and that remains true.

I also like to point out, of course, that our capital efficiency continues to improve, our development cost has come down to some 40 -- by some 45% over the last couple of years.

So we continue to get more value for every dollar we spend.

And that also enables us to do more with the same amount of money going forward.

On the North Sea, that was an outcome of ongoing work we've been doing, engaging with a lot of different parties, trying to find what we think is the right answer.

An important element in that decision criteria is worker welfare, fatigue issues and trying to find the right balance between what's good for our employees and staff and what's good for the business.

And based on that pretty thorough review, the conclusion was to move to this shift schedule.

And we will take our next question from Thomas Adolff from Crédit Suisse.

Jessica, 2 questions for me as well.

Firstly, in terms of production.

Overall, it was better than your guidance for 3Q.

And I've noticed a big jump in U.S. GoM volume.

So I wondered if you can provide a bit more color on the sequential trend and the sustainability of this level of production in the GoM.

And then secondly on CapEx.

You say $25 billion for 2018, which is in line with guidance.

But can you just remind us again what the cash portion will be?

And on the $25 billion to $30 billion range for 2019, presumably, that range also includes potential M&A.

And in terms of M&A, presumably, given where the oil price is today, I'm guessing it's becoming trickier to find opportunities.

So are you looking more at renewables or still upstream LNG or U.S. shale?

Great.

Thank you, Tom.

Indeed, Q2 -- Q3 was a strong quarter for our Gulf of Mexico operations.

In Q2, there was a number of maintenance activities going on.

So part of that is coming out of that maintenance period.

It's also the ramp-up of projects, things like Kaikias came onstream early and ramping up.

Stones ramped up in the quarter and other assets that, again, were under maintenance in the second quarter, coming out of that and making an impact in the third quarter.

We have more projects coming onstream, projects like Appomattox and -- in 2019, which should contribute to continued growth in the Gulf of Mexico.

In terms of our capital profile.

$25 billion to $30 billion is the range that does include M&A activity.

That's the cash portion of that is the majority of it.

So I mean, it depends a bit on when leases are capitalized, but let's say that would be some -- no more than $1 billion to $2 billion of that number.

But that will vary a bit, so I wouldn't be too sure, but that's the kind of order of magnitude I think appropriate.

There are M&A activities that we would consider across the portfolio.

Again, that would need to fit within the $30 billion range.

It could be in the Upstream business, it could be in our Integrated Gas business and it could be in our New Energies business.

Our guidance on New Energies remains the same of some $1 billion to $2 billion on average per year.

And we will take our next question from Rob West from Redburn.

Jessica, I wanted to ask you about the digital strategy, and just particularly, the new agreement with C3 IoT.

What was it about their offering that made it attractive to you?

And then what was it that you were looking to change in the way you were doing digital before?

Just in the context that I've been hearing really good things about your condition-based maintenance program for a number of years now, and so I'm wondering what the step-up really is there.

And just a little bit more detail around it.

The second question I wanted to ask you is just, it really feels like there's been a shale deal, like, every day this week, either being announced or completing.

I guess, just I'd be interested in your broad observations about the benefits of consolidation in that space, and whether you're still very happy with the size of your unconventional portfolio.

Good.

Thank you for both the questions, Rob.

On the digital side, just perhaps a bit of larger perspective.

At the group level, digitalization is one of the key agendas for us, and we see opportunity in all parts of our business.

We've got kind of a focus in 4 key areas.

We have it on our asset management, on our subsurface, on customers and on finance.

So those are kind of key focus areas at the group level.

But frankly, there's digitalization activity happening in many corners of our business, whether it be in our retail business in China to our shales business in the U.S. So there's also kind of bespoke activities happening by business as well.

And the combination of all of that, we believe, can help us transform the company and the customer experience and the value we create.

C3 IoT, this Internet of Things, so this is about how we get information about our assets and our equipment and use that to, as I said in the speech, hear weak signals and be able to understand and react more quickly and prevent things from happening, making for safer, more efficient operations.

Our choices always are a combination of criteria, and this is a combination of that.

And provider, the Azure piece is important in terms of who we work with from a cloud computing perspective.

And it's the quality of the offering, it's the ability to scale that's important for us.

And we've been scaling that particular instance across our Upstream business over the last 6 months and expect that to grow exponentially over the next 12 to 24 months.

So I think just a tremendous amount of opportunity.

Again, it's hard for us to put a firm number on it until we actually replicate across the organization, but the potential, as I indicated before, we believe that's some $1 billion to $2 billion in the coming years.

From a shale perspective, starting with our portfolio, we have a very good portfolio.

We've already indicated, if you look at the new projects slide, that we continue to expect that business to grow with our existing portfolio, our existing assets and for production and cash flow to essentially double between now and the kind of early to mid-2020s.

We've got a very good position in light tight oil in Canada; we've got a very good position in Argentina, in the Vaca Muerta; and of course, our Permian position, which we've not at all fully drilled out in terms of the acreage nor from a horizon level.

So we don't feel we necessarily need to do anything more in the shale space in terms of our own portfolio.

But of course, if there's opportunities and we think they're value-accretive, we will look at them.

We're pleased with how we've reshaped that business and the capability we have in that business.

And increasingly, we see ourselves drilling best-in-class wells in the Permian and in other places.

So we believe in our capability.

We believe in the business.

And if there is a value-accretive opportunity, we will pursue it.

And our next question comes from Irene Himona from Societe Generale.

I had 2 questions.

Firstly, you've largely completed the $30 billion disposal plan, and congratulations for that.

So we could think of the portfolio as a little bit more stable or completely stable now.

I wonder, in that context, if there is any indication, any guidance, any direction you can provide to us for what happens to total production over 2019 and '20.

I realize there's no explicit target, but I think it's an opportunity, given that you have completed the disposal.

My second question, going back to the capital expenditure guidance, $25 billion to $30 billion and leaving aside any potential M&A, just focusing on the organic part of that.

I'm interested in the process, if you could possibly share with us the process by which, in the next 60 days, let's say, you will determine whether you settle at the low, medium or high end of that range.

I presume it's not the oil price.

And in that context, if you could also talk a little bit about external inflationary pressures that you may be experiencing.

Good.

Thank you, Irene.

On your first question, the divestment program.

Indeed, we've signed transactions over $30 billion.

We've closed $28 billion and we've received cash of some $26 billion to $27 billion.

So we're kind of inches away from fully delivering on the $30 billion program, which we expect to do by the end of the year.

We will continue to manage the portfolio, though, so I wouldn't want to signal that we think we're done.

We believe we need to continue to actively manage our tail and actively evaluate the return profile of our assets and continue to optimize.

So we've indicated we expect some $5 billion of further divestments over '19 and '20.

And just to say that, that continues to be an active part of our management, ensuring that we've got the right assets, frankly, every year.

In terms of guidance on production, we've tried to provide a lot of guidance in what we expect to happen with the portfolio in terms of growth.

And in the materials, I've talked through some of the key projects, and then in the back, you can see all of the production associated with those projects to give a sense of what you would expect to happen to production if you look those projects when they come on stream and the expectations around production.

We talk about some 400,000 barrels a day of incremental production in -- between '18 and '20 from these projects.

So I think we've tried to provide that transparency.

Importantly, we want to focus more on cash and value.

This is a really important part of our story and our philosophy.

As a leadership team, we want the organization focusing on value.

And if it's fewer barrels, but more NPV, that's a good thing.

And we've consciously reshaped our portfolio to move away from high-volume low-value barrels to high-value barrels.

And you see that shift in our portfolio and that upside in our portfolio with our position in Brazil, with our position in the Gulf of Mexico, allowing us to benefit from when oil prices increase.

So I think that shift in philosophy is important.

We're focusing on value, we're focusing on cash and trying to provide the transparency of how we get from here to the $25 billion by 2020 while also providing the detail on projects so you get a sense of where that's coming from, and as an outcome of that, the impact on production.

CapEx and the range for next year of $25 billion to $30 billion.

A few points there.

Part of it is, in any capital program for a company like ours, we have partners.

There are commercial considerations, other influences that could impact spend in a given year.

So we -- I think having some degree of variance or a range is important because these aren't all 100%-owned Shell projects where we're totally in control.

We do work with partners, and there can be very valid, good reasons why some money is accelerated or pushed out to the next year.

So that's part of why we indicate the range.

There can also be [NPV] activity, and the timing of that is also not within our control.

So those are main drivers around kind of why we provide a range.

And then at the end of the day, we're continuing to sanction projects.

And if projects don't achieve our return value risk profile, they won't be sanctioned.

And so not all of the projects that would be contributing to CapEx next year have necessarily been sanctioned, and we need to go through that process before we finalize the number.

So those are the main considerations.

It isn't about oil price at this point in time.

We have our range that we look at and consider, we know that more or less today.

But it's more around are the projects achieving the right value return profiles?

Managing some kind of partner NPV risk and decision-making processes that are out of our control.

In terms of inflation -- sorry.

And your last point around inflation.

We are seeing some, indeed, more inflation stress than perhaps 1 or 2 years ago.

We don't think it's going to make a material difference to our free cash flow delivery and our ability to meet our commitments to 2020.

However, it is putting pressure and we're going to have to work harder to offset that inflation and continue to drive a cost-competitive company.

So the pressure's there, we're managing it, it's tougher than it was a couple of years ago, but I don't think it's going to materially change our numbers at this point in time.

And our next question comes from Jason Gammel from Jefferies.

Jessica, I just wanted to come back to cash flow again.

I think perhaps one of the reasons you're maybe not getting the credit for what's a really strong number on the quarter has to do with taxes.

And essentially, thus far year-to-date, the cash payments on taxes is only about 70% of tax expense.

So I'm probably greatly oversimplifying the situation here, but in the current commodity price environment, would you expect your income tax expense, assuming no one off items, to be greater than your cash tax payments simply because you're utilizing net operating losses that are shielding you from some cash tax payments?

Then my second question is related to Canada LNG.

You structured the contract in a way that appears to be essentially a lump-sum contract.

And so my question is, do you feel that you've effectively transferred the risk of any cost overruns at the project to the contractor?

Or are there elements of cost where you are retaining the risk of any overruns?

Great.

Thank you, Jason.

On your first question, let me give a bit of perspective.

It's a rather detailed question, and if I misinterpret it, I might give you the wrong answer and we can certainly follow-up in further detail, as needed.

In general, as our Upstream business grows and generates more income, that tends to be in higher tax circumstances than, say, our downstream business.

And so all things being equal, you would see potentially a higher effective tax rate and higher cash taxes with that shift in earnings going more to the Upstream business rather than the downstream business.

So there's a bit of a portfolio piece, so you do need to consider what else is happening in the business.

Indeed, we may have operating losses in some of the jurisdictions, so that could impact cash taxes, so that would also be an influence.

And because of that, it's difficult for me to give you one straight answer.

But the principle that with higher Upstream earnings, you'll see higher taxes, I think, is a fair one.

The other piece is, of course, our divestment program has also influenced our tax payments over the last couple of years, and those -- that hasn't been inconsequential.

That should quiet down as we get to a lower level of divestments and less significant shifts in the portfolio.

But if you need more detail or more insight in how to think about our taxes going forward, please follow-up with the team.

In terms of the contract strategy with LNG.

Indeed, it was lump sum.

The principle on a lump-sum contract is that the risk is transferred to the counterparty.

And so that is -- that's the principle at play, and that's effectively how we're thinking about and how we're going to manage the contract.

So I think I'll leave it at that.

And our next question comes from Lucas Herrmann from Deutsche Bank.

A point of clarity first.

You mentioned earlier that some of the downtime had been Pearl and Sakhalin.

I just wanted to be clear that -- as to whether Pearl was back on stream.

And perhaps whether there's any comment on what the issue was there.

And secondly, just a broader question on demand, the world, what you're seeing at the present time.

Markets are clearly very sensitive, as things stand, to global demand, oil markets in particular.

Are there any observations that you can make?

Great.

Thank you, Lucas.

With respect to Pearl, the plant's up and running, so it's fully operational at this point in time.

And no particular kind of insight in terms of the event, kind of nothing overly noteworthy to mention.

And in terms of demand, oil markets, what I would say is demand continues to be strong.

And I think the volatility is probably more a factor of supply and geopolitics than one around demand.

So we expect demand to continue.

I think the piece that's difficult for us to probably fully understand or predict in the same level of confidence is on the supply side.

And whether it be the pace of removing bottlenecks in the Permian to tension in the Middle East, Venezuela, other places.

So I think it's more the supply side and how that might play out that is less certain and can lead to different outcomes from an oil price perspective.

What we've done as a company, and I'll just take an opportunity to emphasize it, is we're not looking for any one price or a high price to sanction projects, to run our financial framework.

We've reset the company to run in a much more resilient and robust way through a variety, range of price outcomes.

We'll continue to maintain that mindset.

Vito is a great example of projects with breakeven prices below $40.

The next suite of projects will continue to have the same level of expectations around breakeven prices.

So we're going to continue to run the company thinking about resiliency, and importantly, about upside.

And I mentioned that a bit before, making sure we continue to have upside in the barrels, and that's part of our portfolio shift towards the Gulf of Mexico, Brazil, which allows that upside.

And if we get the capital efficiency and the resiliency right, we think we've got a financial framework and a cash flow profile that is resilient through the full range of prices.

And our next question comes from Blake Fernandez from Simmons Energy.

My question is on buybacks.

Based on our math, I think $2.5 billion per quarter is about the run rate you need to do in order to achieve the target on the program.

And obviously, this quarter, you had excess free cash flow over and above that.

So just trying to understand how to think about that in terms of, is this program just going to remain fairly ratable?

And any excess funds just simply be used to bolster the balance sheet?

And then the second question, if you could elaborate a little bit on production-sharing contracts.

If there's anything in the portfolio that we should probably be aware of that could maybe hit production or cash flow, just really anything meaningful that might pop up.

Thank you, Blake.

So on the share buyback program, again, we've been clear in terms of our commitment getting to the $25 billion by the end of 2020.

That gives us roughly 10 quarters left.

And so indeed, you can do the math.

For any given quarter, we're evaluating the circumstance, what the price environment is, what the underlying delivery of the business is.

And we'll continue to make sure we get the right balance in our decision-making.

But again, we're setting up the company in terms of the cash generation to support our ability to deliver on that buyback program over the next 2 years.

From a PSC perspective, I don't have anything of note to mention.

If there is anything on the horizon, we are trying to signal that in terms of our outlooks for the coming quarter, if there's something of note that people should have in mind.

Of course, around the portfolio, there are license expiries that are under negotiation, there's PSCs that are -- that may be expiring or under negotiation.

I think that's generally normal course of business.

And should we think there would be something or that's material or significant, then we would look to include that in our outlook or provide some other disclosure as appropriate.

And our next question comes from Thomas Klein from RBC.

You were talking about LNG Canada just earlier.

In that vein, do you expect to sanction any more LNG projects in the coming year?

And if so, do you still see it as a generally favorable environment to do so?

Thank you, Tom.

So indeed, we have a number of pre-FID projects in our portfolio and in our funnel.

Through the 2020s, I would expect we would bring more LNG capacity on stream.

For us, the decision criteria is much like what we had for LNG Canada: Is the project itself generating the most competitive returns?

Does it offer the most competitive supply option?

And is it coming onstream at the right moment?

And with LNG Canada, we solved that equation in terms of when the project's coming onstream with the right LNG price points and overall competitiveness of the project and returns.

We'll apply the same criteria for further projects that we'll be considering sanctioning over the next couple of years.

In terms of favorability, I think it's -- as I mentioned before, it's the criteria I just referenced.

The world will need more LNG as we go into the 2020s.

We expect a shortfall 2022, 2023.

So we'll be looking to bring online, first, LNG Canada, and I expect further projects to meet the demand and to do so with the most competitive projects.

And the next question comes from Bertrand Hodee from Kepler Cheuvreux.

Jessica, 2 question, if I may.

Two question relating to project FID.

In the summer of 2017, Shell made a very large discovery in the Gulf of Mexico called Whale.

And when you announced the discovery early 2018, I felt there was an intention to fast-track the project, so I'm a bit surprised not to see this project in your pre-FID option.

So can you update us on your thinking about this potential development?

And my second question related to another project, which is certainly not a fast-track, it's Bonga South West.

We have been waiting for Bonga South West in terms of final investment decision, I think, over the last 10 years.

So can you update us on whether you have agreed on fiscal terms and on license extension?

And do you believe this project will go ahead in 2019?

Great.

Thank you, Bertrand.

Indeed, the Whale discovery was one of the most significant discoveries we've made as a company in recent years.

We remain very enthusiastic about that opportunity and it's being actively worked.

So indeed, it is being fast tracked within the organization in terms of how we think about developing that project and bringing it onstream sooner.

And I would expect you'll hear more about that project in the coming year.

The Bonga South West, we're actively working.

We think it's a good project.

It wouldn't be appropriate for me to kind of talk about the current state of discussions and negotiations on the terms, but we remain committed to the project and are hoping to bring it to FID as -- going into 2019.

But again, we've got other partners in this, other stakeholders, all of that needs to be managed appropriately.

And hopefully, we can come to a positive conclusion in the near term.

Thank you.

And our next question comes from Quirijn Mulder from ING.

Jessica, I have 2 short questions, one is about the inflation.

You said there is some inflation pressure.

Is that only the onshore business?

Or is there more you can tell us about the scope of the inflation at this moment?

Is that also, for example, in Deepwater?

And the second question is about the developments of chemicals.

Can you provide me some idea about the -- what you expect about the chemicals, given the -- some of the disappointing results in the third quarter?

Right.

Thank you.

In terms of inflation, I'd say that it's much like what we read in the news, that we're seeing kind of inflation occurring across different economies and affecting wage levels, affecting different parts of our supply chain.

So I wouldn't say it's just onshore, but it's not necessarily Deepwater either.

We benefit from a number of enterprise framework agreements in terms of how we manage our supply chain.

So during moments of inflationary pressure, we're able to not be affected because of these arrangements that we have in place.

So that's helping shield some of it, and that's certainly the case in places like our Deepwater business.

So it's a bit of a mixed bag, depending on where you are in the organization, the nature of the agreements that we have in place.

What I'm trying to signal is that we are seeing it, it is a pressure, and -- but I don't expect it to be a material -- that have a material impact on our cash flow, but just a signal in terms of as we look to continue to have a more competitive cost structure, the environment's a little less friendly than it was in the last couple of years.

In terms of the chemicals business, we remain bullish on the sector.

We believe that demand for chemicals will continue to be very strong.

It has outpaced GDP growth historically.

We think that will continue to occur going forward.

Q3 is a reflection of the current margin environment.

There's new supply that's come onstream, so there can be some short-term softening of prices, and that's a bit of what we've been exposed to, also some increased feedstock prices.

And there will be ups and downs, both from a margin and cost perspective in a given quarter.

But if you look at it over the long term, we believe the industry fundamentals are strong in terms of demand growth.

We believe we've got a competitive position in terms of our portfolio and our differentiated strategy.

And so it will remain one of our growth priorities.

Of course, we've got a couple of projects that are being built and will come onstream in the next couple of years, will also contribute to the CFFO growth, free cash flow growth that I mentioned.

So fundamentally, we believe in the chemicals business.

We continue to invest it.

And there will be some ups and downs, both from a margin and cost perspective, but the long-term trajectory, we believe it will be very attractive from a cash generation perspective and a returns perspective.

And we will take our final question from Henry Tarr from Berenberg.

I guess when you look at the projects under construction, are there any trends you're seeing overall in terms of delivery and budget?

So recently, things like Kaikias, I guess, have come on ahead of schedule and possibly under budget as well.

You've referenced, a little bit, rising cost.

But overall, is delivery still surprising positively for you internally?

And then the second question, just quickly, would be on the trading contribution in the IG segment, which you said was strong in the quarter.

Is it possible to quantify that?

Or not really.

Thank you, Henry.

So in terms of project delivery and are we, on average, being positively surprised and achieving what we set out to achieve, I would say, yes.

So if you look at our project delivery over the last 3 years, across a number of metrics, you can demonstrably see that our performance has measurably improved over the last couple of years.

And so let me just talk through a couple of these areas.

I mentioned the unit development cost has been down by some 45% in places like our Deepwater and our unconventionals business.

That's in absolute terms.

We've improved our project cost, our capital efficiency.

If you look relative to our commitment, so when we make -- take FID, are we spending above or below our commitments?

My team just did a look-back on a number of projects.

And if you look back over the last 10 years, what you see in the last couple of years is, increasingly, we are under budget.

And so again, from a trend perspective, our capital efficiency and our capital discipline, capital stewardship and our project delivery are coming together to have lower capital outcomes.

And then if you look at it from a competitiveness standpoint, are we delivering projects and wells relative to industry in a competitive way, both on cost and schedule?

And again, we take a look at this just recently, and those trends have all materially improved over the last couple of years.

So indeed, I think we have structurally changed our delivery of projects within Shell.

We've increased our capability.

I think the quality of the decisions we're making in terms of the way we scope projects, the way we set the capital budget upfront has improved.

And then when you move into execution, our execution capability has materially improved in the project space and the well space.

And Kaikias is a great example of our delivery capability coming to life, and being able to show you that this year in terms of coming in way ahead of schedule and below cost.

Appomattox, post-FID, we've reduced cost by some 30% to 40%.

So another proof point in terms of our delivery capability in new projects improving materially over the last couple of years.

In terms of trading contribution, indeed, Shell's Integrated Gas portfolio is a differentiated portfolio relative to the market.

Our customer positions, our supply positions around the world give us unique capability to manage risk on behalf of our customers and to optimize shipments around the world on a daily basis.

That combination of our physical position and our trading capability allows us to generate more margin per tonne than, I believe, others can.

We don't separate trading because these are truly integrated, this is managed in a very integrated way and it's appropriate to look at it on that integrated basis.

But indeed, the capability that you're seeing in our trading business, leveraging the portfolio that we have is what's contributing to this consistently high levels of cash flow in our Integrated Gas business.

With that, that's our last question.

Thank you all for joining the call today and for your questions.

The fourth quarter results are scheduled to be announced on the 31st of January 2019.

And Ben and I will talk to you all then from London.

Thanks very much, and have a good day.

And this concludes today's conference.

Thank you for your participation and you may now disconnect.