Royal Dutch Shell Plc (

RDS.A

)

Q4 2011 Earnings Call

February 2, 2012 08:30 a.m. ET

Executives

Peter Voser - CEO

Simon Henry - CFO

Analysts

Teplan Justalingram - Nomura International

Iain Reid - Jefferies & Co

Jason Kenney - Santander

Paul Stetting – HSBC

Alejandro Demichelis - Merrill Lynch

Robert Kessler – Tudor Pickering Holt

Jason Gammel - Macquaire

John Rigby – UBS

Martijn Rats - Morgan Stanley

Irene Himona – Societe Generale

Oswald Clint - Sanford C. Bernstein & Co.

Alex Murray - Analyst

Iain Armstrong – Brewin Dolphin

Mark Gilman - Analyst

Colin Smith – BTB Capital

Lucas Herrmann - Deutsche Bank

Jean-Pierre de Metien - Analyst

Presentation

Peter Voser

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» Royal Dutch Shell CEO Discusses Q4 2010 Results - Earnings Call Transcript

Ladies and gentlemen, a very warm welcome to you all and also those who are joining by phone and on the web. We’ve announced today our Full Year’s results and we will run you through that but we want really to concentrate and spend most of the time today updating you on portfolio and strategy and discussing a new agenda for the next tranche of growth for Shell.

So, we will review what we have achieved since 2009 then let’s look at the gross agenda going forward and then the financial framework. And of course, there will be plenty of time for questions. You know this page.

The global economy and energy markets are likely to see continued high volatility; this is the interplay between robust structural growth in energy demand and unprecedented geopolitical events such as the Arab spring, the euro-zone crisis or the Japanese earthquake.

Shell has the scale and portfolio, choices to manage it through cycle investment strategy for sustainable growth. Innovation and a competitive mindset are at the heart of what we do. We have delivered the strategic drivers that underpin our 2009 to 2012 targets, cost takeout, continuous improvement and 14 successful project startups.

Our 2011 underlying earnings increased 37% to $25 billion and cash flow from operations excluding working capital actually reached $43 billion. Our balance sheet now has improved and has a position of 13% during and ends 2011 compared to 17% at the end of 2010.

Our improving financial position gives us room to announce a measured increase in both, our investment levels and cash returns to shareholders today. We offered some $10.5 billion of dividends in 2011, which is the largest dividend in our sector and about 12% of all dividends paid into (inaudible).

Our spending 2012 will be $30 billion net to support the growth program for the medium term with almost 60 new projects on the construction and in design and this investment is underpinned by new cash flow targets for the next four years up to $200 billion for the timeframe 2012 to 2015. So, this is an ambitious program and lots to do.

Now, let me start with safety and reliable operations that’s at the heart of everything we do. Our HACC key figures are trending in the right direction, for example, 2011 TRCF and the numbers of spills are broadly similar to 2010 and our fatalities numbers have declined. However, we still had fatalities and other incidents last year and operational spill volumes increased and so we have more to do here.

I’m satisfied the way our people actually responded to the incidents like we had the fire in Bookham, the gallon spill into North Sea and also the Bonga spill in Nigeria, but still there is no doubt we have to make further improvements here, we look at these incidents and take the learnings across our global portfolio with a continuous improvement mindset here.

Now, let me look at the overall development. Rapid economic development in non-OECD countries is driving sustained and long term demand growth for all forms of energy. Demand for oil and gas overall could rise by 40% by 2030. Now, and this growth will be kind of equal or equivalent to seven North Seas which will require huge industry investment. As many traditional basins actually in decline, the challenge is much larger, replacing declines of the one side as well as meeting demand growth on the other.

Regulatory and political uncertainties combined with challenges in the net market are adding to price and cost volatility in this longer term trend and we’re seeing local pressure points from things like excess refining capacity in the Atlantic basin and the supply bubble in the North American gas market.

As a result of all of this, we’re seeing strong volatility in our underlying quarterly earnings. Our highest quarterly underlying earnings in the last three years were $7 billion in Q3 2011 or more than 2.5 times our lowest quarter in Q3 2009. These are cyclical effects in a world where volatility has increased on both volatile macro and volatile earnings are now a fact of line and we’ve to deal with that in the industry.

Now in Shell, we’re dealing with this by staying focused on the longer term trends. Shell activities provide affordable safe and reliable energy supplies for our customers worldwide. We use conservative ranges and long term assumptions for project assessment. We plan inside a $50 to $90 range for oil and $4 to $6 for US gas.

After we’re investing for growth with a strong focus on exploration and continued portfolio build into resource plays like liquid rich shales. Downstream, we’ve taken out a lot of capacity in the last few years. Now, even to optimize this reshaped portfolio to maximize profitability. Hence, we’ll have some very selective growth themes.

When climate change, we see mitigation opportunities in energy efficiency and CO2 capture and storage as well as investing in themes like bio-fuels which have CO2 advantages. On the financial side, we’re planning for a balance between attractive payout for shareholders today and investing for shareholder value in the long return.

So, let me have a look at the performance in 2009. Our underlying CCS earnings have increased by some 115% since ’09 and cash flow from operations excluding working capital movements has increased 80% versus 2009 to $43 billion. We’ve been investing for new growths and selling down non-core positions in upstream and downstream.

Underlying oil and gas production has increased as we deliver our growth plans and refining capacity has come down by net 15% due to asset sales. And for shareholders, our total shareholder return was round 70% over the last three years, a sharp increase over a period and a competitive performance by Shell.

And as you can see on the next slide, the portfolio has developed tremendously in the last few years. We will show you how this fits together in a moment. We started up three really substantial projects last year, and you know them, (Italian), Qatar, GTL and oil sands. We went ahead with bio-fuels in Brazil. And we took FID on the floating LNG in Australia. This is all part of our large sequence of startups and portfolio moves in recent years.

So, this is my introduction and now over the next 45 minutes Simon and I will take you through a recap of strategy, what we’ve delivered over the last few years and Simon will do that then I’ll update you on the outlook and Simon will also make some comments on the financial framework and then we’ll open up for questions and answers with all of you. With that over to Simon.

Simon Henry

Thanks Peter and good to be here and seeing you all again today. So, I just got to update you on delivery against the targets that we set over the past few years and hope Peter takes you through the portfolio.

We sent out three priorities for everyone in Shell back in 2009 when Peter took over and in the near-term raising our game on short term performance, delivering our growth projects particularly targeted at the Shell and working on new growth options for the next wave of investment that will grow the cash flow further into the future.

We’ve reduced our underlying operating costs with the corporate reorganization 10%, you may recall against that 2009 baseline and we built a continuous improvement mindset inside the company. So now, cost saving opportunities for multiple smaller scale initiatives into the future.

Our free cash flow before the dividend payment was $23 billion in 2011, $16 billion after the injection into working capital. And, we declared $31 billion of dividend over the last three years. Our project delivery in the last two years has gone very well and combined with the higher oil prices that’s helped us to rebalance the financial framework to free cash flow and that underpins the dividend increase that we announced earlier today. So, we’ve worked hard to generate new options and we’ve launched new projects for medium term growth.

Few words on the quarter, the current cost of supply earnings, CCS earnings for the quarter including identified items was $6.5 billion. Excluding the identified items which are primarily gains on asset sales, the CCS earnings were $4.8 billion, earnings per share increased of 16% that’s compared to the fourth quarter 2010.

On a Q4 to Q4 basis, we saw higher earnings in upstream, but weaker results in the downstream. The earnings accruals were impacted by higher oil prices and cyclical pressures in the industry downstream margins. We also had warmer weather which does reduce gas demand quite significantly for us in Europe.

Our cash flow from operations in the quarter was $6.5 billion, it was just over $7 billion excluding working capital and the dividends in the quarter were $2.6 billion of which around $1 billion were settled with new shares under the scrip dividend program. We’re offering that scrip program again for the fourth quarter 2011.

Our buybacks for the quarter was $0.3 billion and they’re all under the program to offset the dilution caused by the scrip. Now, quarterly results are important, but they’re really only a snapshot of our performance in what is very much a long term business.

Since 2009, our upstream underlying earnings have increased by $12 billion, the upstream cash flow excluding working capital has increased $15 billion. Of course, as underpinned by our $50 per barrel increase in the oil price, we’ve had higher gas realizations as a result and we’ve also seen profitable production from the new growth projects and under contribution from new projects like Pearl gas-to-liquid continued to grow and will continue grow in 2012.

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