Royal Dutch Shell's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Royal Dutch Shell plc (RDS.A)

Q1 2012 Earnings Call

April 26, 2012 08:30 am ET

Executives

Simon Henry - CFO

Analysts

Teplan Justalingram - Nomura International

Jon Rigby - UBS

Iain Reid - Jefferies

Martijn Rats - Morgan Stanley

Michele della Vigna - Goldman Sachs

Rahim Karim - Barclays

Peter Hutton - RBC

Kim Fustier - Credit Suisse

Jason Kenney - Santander

Lucas Herrmann - Deutsche Bank

Robert Kessler - Tudor, Pickering, Holt & Co.

Irene Himona - SocGen

Neill Morton - Berenberg

Presentation

Operator

Welcome to the Royal Dutch Shell Q1 results announcement call. There will be a presentation followed by a Q&A session. (Operator Instructions). I would like to introduce our host Mr. Simon Henry. Please go ahead.

Simon Henry

Thank you very much operator. Welcome to Royal Dutch Shell's first quarter 2012 results presentation. Good morning or good afternoon wherever you may be. I will take you through the results and the portfolio development for the quarter and leave plenty of time for questions. First of all though the cautionary statement.

Okay, quarterly results are important, but they still remain a snapshot of performance in a volatile industry where we are in the process of implementing a long-term strategy. First quarter earnings excluding identified items were $7.3 billion and also the earnings per share increased to 15% compared to the first quarter last year. With $2.4 billion of divestments in the quarter, we are increasing divestment target for this year from $2 billion-$3 billion range to at least $4 billion.

Underlying oil and gas production increased by 4% in the quarter. We started up new projects in Upstream and now in the Downstream for further growth and we continue to mature new options, mostly of course in the Upstream with successful drilling in the Gulf and new exploration acreage in the quarter. So this continues the progress we made on the new options in 2011, for example the Abadi floating LNG project in Indonesia and the additional liquid-rich shale positions.

The dividend for quarter one will increase year over year with the strategy delivering underlying and sustainable financial growth. So we are making good progress against that target to deliver a more competitive performance. To give you some more details, starting with the macro environment. And if you look at the macro picture compared to the first quarter last year, oil prices are higher. There is an increase in the differential between the Brent and WTI.

Our overall global natural gas realization, they increased from the first quarter 2011. Well of course the US Henry Hub related prices declined quite sharply. Our overall refining marketing and chemicals margins were all weaker for Shell year over year. Currently we are seeing a very mixed picture on energy demand. Oil prices have been supported by geopolitical events despite a market which in our view is fundamentally well supplied. We are seeing LNG demand increasing year over year led by Asia. In the US, a combination of improving economic conditions and low gas prices are now stimulating gas demand. But European gas demand remains weak due to the weak overall economic conditions and basically price competition with coal.

In oil products, our underlying volumes were flat quarter one to quarter one. Demand is being eroded in developed markets by high prices. Our volumes are flat in Europe and the US and a firm demand for branded fuels in Asia. Economic outlook remains very uncertain particularly in Europe where many commentators see the prospect of new recession. So those are the Q1 to Q1 trends. In aggregate a weak demand, a little evidence of fundamental year-over-year recovery or in fact much improvement since the fourth quarter of 2011.

Before I turn to earnings, let me just highlight that we published country level tax information for the first time yesterday. And Shell is committed to high standards of transparency to all stakeholders and we have had a number of questions from you on this topic and I hope if you access the information on the website, you will find this information useful and I will be happy to take any questions you might have on it.

Moving on to the earnings. Current cost of supplies, CCS earnings in the quarter including the identified items were $7.7 billion, excluding identified items, the earnings were $7.3 billion. Earnings per share increased 15% compared to 2011. On a quarter one to quarter one basis, earnings in Upstream were higher and Downstream lower. Cash flow generated from operations was $13.4 billion. Dividends in the quarter were $2.7 billion of which $1.0 billion was settled with the new shares under the Scrip Dividend program.

Now we are offering the scrip again for the first quarter 2012. We have recently restarted share buybacks in the quarter, the second quarter of this and as part of our overall strategic intention to offset dilution from the scrip. Scrip dividends have now totaled over $5 billion since we launched in 2010.

Just let me talk about the business performance in a little more detail. Upstream earnings excluding identified items were $6.3 billion in the first quarter and that's an increase of 35% versus the same quarter last year. The earnings were of course driven by higher oil and international natural gas prices, but also by volume growth from high margin new projects particularly in Qatar and positive environment for gas trading.

There were some offsets from higher costs and depreciation and lower US Henry Hub gas prices. The headline oil and gas production for the first quarter was 3.6 million barrels of oil equivalent per day and that is an increase of 4% excluding asset sales exit and price impacts. In addition we had some 80,000 barrels of oil equivalent per day of entitlement loss from profit-sharing contract as our lower entitlement kicked in the contract and milestones and high oil prices moved PSCs out of cost recovery mode. The LNG sales volumes grew by 17% quarter one to quarter one and not reflect basically growth from Qatargas 4 and Nigeria LNG. The year-over-year plant maintenance impacts were negligible in the first quarter, Upstream and Downstream.

During the second quarter, though, of 2012, looking forward there will be higher levels of plant maintenance activities on offshore sales in the Americas and Asia-Pacific and in Europe. This is expected to lead to a production impact, a negative impact, of some 50,000 barrels of oil equivalent per day across the second quarter and that's compared to the second quarter in 2011.

In Qatar, Pearl gas-to-liquids project continues to make good progress. We are on track to release full capacity in the middle of 2012 as planned. We are running planned maintenance on sections of both of the Pearl trains during the second quarter. These pit-stops, they are part of the startup phase of the project that clearly impact production. The three large start-ups last year -- Qatargas 4, Pearl and the Athabasca Oil Sands Project in Canada are capable of producing 450,000 barrel oil equivalent per day at their peak production oil capacity.

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