Shell Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2023

There are 16 speakers on the call.

Operator

Welcome to Shell's Q1 2023 financial results announcement. Shell's CFO, Sinead Gorman will present the results, then host a Q and A session along with Shell's CEO,

Speaker 1

Welcome to Shell's 2023 1st quarter results presentation. Despite a less favorable macro environment than last Quarter, we delivered another set of strong results. Our performance was due to our well positioned, resilient portfolio and improved US offshore platform in the Gulf of Mexico which has started production. Vito has an estimated Peak production of 100,000 barrels of oil equivalent a day. Changes to the original design created a reduction of approximately 80% in CO2.

Speaker 1

This rework also brought about a cost reduction of more than 70% from the original house concept. Projects like Vito There is a blueprint for other projects, allowing us to generate greater value from the Gulf of Mexico. Also in the Gulf of Mexico, we Allow us to bring on new production through our existing Appomattox platform. And in the UK, we have restarted operations at our Pierce field Following a significant upgrade to allow gas to be produced. Peak production is now expected to reach more than twice what it was before the redevelopment, Bringing much needed gas to the UK.

Speaker 1

We also continue to make progress in building our low carbon portfolio. We completed the acquisition of Nature Energy, Europe's largest producer of renewable natural gas, complementing our US position. And we also completed the acquisition of Volta, which means we now own and operate one of the largest public charging networks for electric vehicles in the US. As part of our focus on delivering more value from the portfolio, we divested 3 non core upstream positions. 2 of them are in Malaysia's Barham Delta and the other is Eira Energy in California.

Speaker 1

In summary, we delivered strong results, significant shareholder returns And continue to high grade the portfolio whilst navigating a volatile market. Lastly, there are 2 important upcoming events. Our annual general meeting on May 23rd, where we ask you to support the progress we have made against our energy transition targets By voting for our Energy Transition Progress Report. And please also join Wael, myself and several of the senior leadership team for our Capital Markets This day in New York on June 14th, when we intend to share more on how we are driving value through improved operational performance and Disciplined portfolio management to deliver attractive shareholder returns. Thank you.

Operator

We will now begin the question and answer session. Please press star 2. Phone callers are requested to mute the audio on their computer webcast and listen attentively to their telephone audio as we begin to progress through the telephone questions.

Speaker 2

Thank you for joining us today. We hope that after watching this presentation, you've seen how we delivered strong results And how we continue to high grade our portfolio. Today, Sinead and I will be answering your questions. And now, please, could we have just 1 or 2 questions each, So that everyone gets the opportunity. And with that, could we have the first one please, Dan?

Speaker 3

The first question is from Oswald Clint at Bernstein. Please go ahead.

Speaker 4

Yes. Thank you very much. Yes, two questions, please. The first one, I'm not going to ask any big Capital Markets Day questions. I'm sure you want to leave those for next month.

Speaker 4

But the first one, maybe on the topic of capital investment levels. I've seen Shell pulling out of some carbon capture projects like the UK one, Northern Endurance, I've seen Pulling out of big LNG resources like Browse. So both big areas where I guess we would expect Shell to kind of lean in further. So Perhaps just talk around the rationale there. Is this signaling anything towards favoritism to perhaps faster payback oil At the moment or is it inflation?

Speaker 4

Or is it just some specific project economics around things like that? And then secondly, Going down to my favorite marketing division, we have the mobility division, very useful gross margin split that you give us. It looks like really strong 1st quarter performance across even the basic fuels, the premium fuels, the convenience and even the e mobility just Actually isn't that far behind. So how do you explain what's going on there? Is this simply China reopening?

Speaker 4

Is it lag demand recovery post COVID, is it your own Shell initiatives? Or if you could respond to that and perhaps just talk around what you're seeing in terms of broader Oil product demand so far on the ground today, please. Thank you.

Speaker 2

Okay. Oswald, thank you for that, and thank you for Recognizing that there's a few things we'll need to be able to leave to Capital Markets Day 23 next month and look forward to seeing you and others there. So just I start off with your first question and then if you want to take the second question on marketing as well. I think What's important here, Oswald, is we have talked about wanting to be performance focused as well as really driving discipline and Capital discipline, but discipline more broadly in terms of ensuring that we are in the projects that potentially have the running room to deliver the sorts of returns we want. Our strategy is clear.

Speaker 2

We have said we want to be an advantaged oil. We want to continue to be strong in our integrated gas business. We also want to lean into some of the lower carbon energy value chains as long as they are profitable. So the examples you mentioned there, NEP, for example, in the Northern Endurance Partnership in the UK, was one that was a very specific project that did not fit Our economic requirements. Braus similarly is a project that's competing with some of the other projects in our portfolio.

Speaker 2

And on balance, it simply does not attract the fees ex nor the CapEx that other projects are out competing it for. And similarly, I was asked in the media interview today the decision to pull out of a couple of projects at Bukham in Singapore. These are all project specific decisions on the basis of making sure that we are a lot more focused early on And how we deploy our fees ex and eventually how we deploy our CapEx to be able to achieve the returns because that has to be a core part of how we can deliver value longer term to our shareholders. No change in strategy, just focus on discipline. Sinead?

Speaker 1

Indeed. And thank you, Oswald. Yes, our Marketing division, has certainly done very well this And you see $900,000,000 of earnings compared to the $400,000,000 that we saw in Q4. Number of factors, as you said, good across the different areas. And of course, we build Particularly on the mobility side as you go into driving season that's coming through.

Speaker 1

What we also saw was very high, for our perspective, margins from our lubricants business. So indeed, in terms of being able to actually take the lower base costs that come through, which is partly linked to the macro, of course, but those margins were very strong and have Played out in the results. Overall, we are seeing recovery coming through from China, of course. More to watch on that one to see how fast that progresses, but we'll be watching that as we go into q2. But particularly on marketing, we also look forward to seeing driving season come through as well.

Speaker 1

Thank you.

Speaker 2

Thanks, Sinead. And thank you, Oswald. Dan, if we can have the next question, please.

Speaker 3

The next question is from Michele Della Vigna at Goldman Sachs. Please go ahead.

Speaker 5

Well done, Sinead. Thank you and congratulations for the strong deliver and looking forward to the Capital Markets Day. 2 Quite specific questions, if I may. First, I wanted to see if you could provide us with an update on 2 very valuable but also Complex projects in your portfolio can Canada LNG and the Pennsylvania cracker. And secondly, I wondered if you had any comments on the Temporary export tax imposed in Brazil, that's a very important and profitable asset in your portfolio.

Speaker 5

Is your understanding that the most likely outcome is this 4 month tax effectively expires at the end of June? Or you think there is a possibility that it gets And beyond that, thank you.

Speaker 2

Thank you, Michele, and nice to hear from you and thank you for the kind words. Do you want to start with the Brazil tax question?

Speaker 1

Certainly, indeed. So as you say, so in terms of Brazil, we are a very strong player in Brazil. We have great positions and great relationships In the country, and it's somewhere we've been for a long time and see a long future to come. Of course, it's disappointing to see taxes come in play, which actually threaten some of the investment climate. Well, we understand that it is in place for this 4 month period.

Speaker 1

I certainly wouldn't want to speculate where the government will go next on that one. What we are seeing, of course, is that we have put in place and challenged the injunction as it stands. So we look forward to seeing where it plays out.

Speaker 2

Thanks, Sinead. And Michele, to your first question around LNG Canada and Pan Chem, what we now call our Shell Polymers Monaca facility. So LNG Canada First, we continue to be incredibly excited about the prospect of that project coming on stream around middle of this decade. It's making good progress. So we are last update I got, we already passed the 70% mark in terms of construction on-site.

Speaker 2

Coastal GasLink, the developer of the pipeline, is also making good progress. And this is despite what Has been, of course, a difficult period when you consider the COVID disruptions, broader supply chain challenges around the world. So No new guidance other than to say we continue to anticipate start up there around middle of the decade and look forward to seeing where that goes. On Shell Polymers Monaca, again, a world class facility, significantly advantaged in the location that it sits And an opportunity to really sort of create sustainable earnings into the future for us as a company. The ramp up, as we have guided in the past, is going to take the rest of this year.

Speaker 2

It's been slower than we would have hoped for, But the team is doing a great job battling with some of the obvious technical niggles that startups typically have. We continue to be hopeful that through the course of this year, we Bring it up to the levels that we had anticipated in the plan. Thanks for the questions, Michele. Dan, can we go to the next question, please?

Speaker 3

The next question is from Lydia Rainforth at Barclays. Please go ahead.

Speaker 6

Thanks and good afternoon to all of you. Two questions if I could. While I'm just building on sort of Oswald's question earlier, we've seen a lot of what you don't want So in terms of selling brows, the Evercom projects, can you talk us through what you do want to do more of and possibly link to that? So obviously, the Operation performance has been pretty good during 1Q, particularly in IG. Is anything specific changed there?

Speaker 6

And then secondly, probably for Sinead, The OpEx number was down quite significantly quarter on quarter and essentially flat versus last year. I'm just wondering what, if anything, has changed in terms of How you're thinking about that number versus 4Q? Thank you.

Speaker 2

Great. Lydia, thank you very much for that. I'll indeed take the first one and then come to Sinead on the OpEx question Or the first two. The on what we what I would like to do, I think firstly to recognize what I don't want to do is To invest in projects that are weak returns and simply to spend fees ex on projects that don't have Potential to be able to be compelling return projects for us as a company. What do I want to do?

Speaker 2

I want to invest in the opportunities that are very much into our strategic focus, And we can touch on that, of course. But the opportunities that where we can see differentiated value being created by us as a company And where we can see the sorts of returns that you would expect when we make those investments in those projects. So I would describe it much more of a ruthless focus on the allocation of capital In a way to be able to ensure we are delivering the returns that we expect. Multiple examples of how we do that, right? So We've just FID Dover, for example, in the Gulf of Mexico, a very exciting opportunity to be able to bring back new Molecules into Appomattox, take the opportunities around our LNG.

Speaker 2

We've taken the NFE Northfield expansion decision last year and look forward to taking the Northfield South FID soon as well. So that's another Area where we want to deploy capital because we see the sorts of returns. And then if I look at the low carbon space, of course, we've completed Nature Energy. That's a space we're excited Buy and we will continue to invest in that space because we see the synergies with a lot of our short positions, in particular in Europe, In our commercial road transport, for example, where we will deliver a lot of that renewable gas. And so I think it's critical to look at the individual projects.

Speaker 2

And what you will see us do is shut down projects that we don't see having running room and be very focused on the ones where we can create value. Do you want to touch on that and maybe on the IG performance, which I didn't pick up as well?

Speaker 1

Certainly, indeed. So on the OpEx side, Lidia, I think in the same way as well talked about Being ruthless in the focus of value and focusing on where you spend your dollars in terms of the CapEx, we're moving into that exactly the same view with respect to OpEx. So for us, it is very important to make sure we show that discipline and that focus with respect to OpEx. In terms of the Specifically, what you're asking about, which is the change between Q4 and Q1, we typically see our Q4 being higher. It's just traditionally what occurs in our business, Largely because we do, look at decommissioning in particular and look at the amounts that come through in Q4 there as well.

Speaker 1

There's also some staff costs. And actually, last Q4 as well, we had some advertising that came in as well. So that's the side of things that would have, flowed through. Taking you to the 2nd IG one, the IG performance one indeed. So really pleased to see IG delivering what it did, incredibly strong earnings, as you will have seen.

Speaker 1

So what occurred there? 1st and foremost, just great congratulations to the assets. The performance was outstanding. So we saw operational performance hitting all of the metrics that we would like to see, Particularly in Australia. So we saw Prelude up, but we saw all the other assets up as well, which is very, very pleasing.

Speaker 1

And you see that flow through. Those volumes were there for our optimization, and we saw that. And you'll see on Slide 7 in particular, I think, Lydia, in the pack, where we refer back to what we've discussed before, Really about the fact that we are very much situated for, as you've heard me talk about, the Northern Hemisphere winter. So Q4 and Q1, looking at those volumes coming through, And that's what you saw. But of course, it was great to see it coming very much from the operational assets as well.

Speaker 1

And of course, the risk management or the paper aligned very closely. Thank you.

Speaker 2

Thanks, Sinead and Lydia. Thank you for the question. Dan, can we have the next question, please?

Speaker 3

The next question is from Christian Malek At JPMorgan. Please go ahead.

Speaker 7

Hi. First, congrats on the strong results and two questions for Both Sinead and Wael. And Wael, appreciate you being on the call as well. The first is on trading and how you think about framing cash return going forward In the context of contributions from trading as it continues to be an important, but in itself, more volatile contribution to cash flow. So I just think about the mix of the buyback versus dividends.

Speaker 7

And as you particularly compare your valuation to the U. S. Majors, I would love to hear about how you think this gap can be closed, especially as it seems cash flow and in turn buybacks Fueled by trading doesn't seem to be doing a great job in closing the multiple. That's the first question. The second question is the macro outlook Seems totally conflicted with any resilient data points on one hand coming through in some subsectors, but then yet recession appears to be the dominant narrative.

Speaker 7

So I'd appreciate it's hard to take a strong view near term, but I want to know whether you are, and forgive me for asking, bullish or bearish over the long term fundamentals in energy Maybe first in oil and then in gas LNG. Thank you.

Speaker 2

Thank you for the questions. Christian, you want to take the first one?

Speaker 1

Sure. Indeed, Christian. So from the trading perspective, it's a really interesting one because this can often come up. So the way we very much look at it is around the optimization rather than Pure trading. I don't think it's any surprise that you're seeing, you know, a variety of the pure players out there, the pure trading highs as you're actually just Buying assets so that they can sustainably deliver exactly what we do, which is optimization around the assets.

Speaker 1

So that's very much coming through. And in the same way as I talked about With respect to Libya, in terms of IG, we're seeing the ability to be able to trade around water or to optimize around what actually comes from those assets. We see the same thing actually coming through, particularly this quarter in terms of our Refining and Chemicals business, our Chemicals and Products business. So there We saw, of course, some of our competitors bringing down refineries in Q1, particularly in the US. And we made a conscious choice to optimize around particularly Norco, where we moved out Some of the turnaround to later this year to be able to, capitalize on both the, really, the stronger Finding margins compared to where it may go to, but of course, actually to get the volumes out there.

Speaker 1

So I would argue very strongly that a huge part of what we're doing, Christian, is actually optimization around The assets that we have rather than what you would call pure trading. And therefore, I would say that that's what should be considered as we go through on it. You alluded to, of course, the U. S. Valuation and GAAP, etcetera.

Speaker 1

I think I would come back to Time and time again, we're very focused on creating a track record by delivery. That's what you saw last quarter. That's what you're seeing this quarter. It's about ensuring we have performance, performance, And you'll see the discipline coming through, in particular, in terms of the way we allocate capital. So this is about quarter on quarter coming through.

Speaker 1

I think both of those will occur. And as I said before, with respect to what you call what you refer to as the trading side of things, that is truly optimization. So providing we can keep getting our operational performance well, we hand over an ability to optimize or to trade around that.

Speaker 2

Thank you, Sinead. And Christian, to your first your second question, sorry, about the macro outlook. I think you characterized it well. It's Difficult space to predict where things are going at the moment, so I won't even try to go down that pathway. I'll give you a couple of perspectives.

Speaker 2

I think on the oil side In the first instance, of course, we've seen the sell off over the last 48 hours or so. Clearly, there are market jitters. And I can understand The reactions to the Fed interventions and more Central Bank interventions with the tightening of credit It's having an impact on the market. But if you look at the physical fundamentals, that doesn't play out. So the physical fundamentals continue to be strong All the way through looking at backwardation in the crude curve at the moment, people still want to be able to get their hands on cargoes ASAP.

Speaker 2

So those fundamentals are good. If I look at demand, we see China coming back. And right now, Crude demand in China is almost back to 2019 levels. Of course, there isn't a huge amount of spare capacity left in OPEC. And you add to that the fact that the strategic petroleum reserve is at historic low.

Speaker 2

All of it sort of tells you that The supply side is constrained, and this is all assuming Russia continues to produce as it has, which is in essence at or slightly above Pre invasion levels. And so the supply side is pretty tight, and the question is going to be what happens on the demand side, in particular In the U. S. And Europe. I think on the LNG side, the prompt is weak.

Speaker 2

You can see that, of course. And that's understandable given the fact that European storage levels are high. We're looking at roughly 55% at the moment in Europe storage, which is high compared to historic averages. But also North Asia has really high storage levels, Japan, Korea. And that's a function of significant storage done last year And something which I think is putting some of that downward pressure.

Speaker 2

But if you look to the latter part of this year, The picture is a bit more mixed. There isn't a huge amount of new supply coming into the market, no more than 3,000,000 tonnes for the rest of this year coming on. Maintenance will start to kick in as many of these facilities have been run hard for quite some time. And then, of Course, Chinese demand is starting to really pick up. So all of that seems to indicate against a more bullish trend in the second half of this year.

Speaker 2

Put all of that together, I think for a company like ours, we are well positioned, of course. I mean, marketing will typically have stronger quarters In lower commodity price period, volatility helps us, of course, on the trading and optimization side and so on and so forth. And so I think that's the beauty Of the many strong businesses that we are blessed to have as a company. Christian, thank you for those two questions. And Dan, if we can go to the next one, please.

Speaker 3

The next question is from Amy Wong at Credit Suisse. Please go ahead.

Speaker 8

Hi, good afternoon and thanks for taking my questions. I have 2. The first one is Just thinking about your decarbonization strategy, based on my analysis, it looks like Shell is relying More heavily on using natural sinks and carbon capture as part of delivering that decline in CO2 intensity. So could you shed on some insight on why that is the case? Or is there any scope to maybe put more emphasis on scope 1 and 2 reductions as well?

Speaker 8

That's my first question. And then my second one is on a rather small piece of your business, which is sectors and decarbonization. I just want a question on that because it's small, but it's quite important in terms of kind of your growth there. And I see that the volumes, the growth there have Slowed down significantly and even went backwards quarter on quarter as well. So just some insight into what's happening in your sectors and decarbonization offering, That would be very helpful.

Speaker 8

Thank you.

Speaker 2

Great. Thanks, Amy. I'll take the first one and then if you wanted to take the sectors one. On the decarbonization strategy, I would look at it, Amy, from two perspectives. One is what we can do to be able to bring down our own operational emissions.

Speaker 2

We've put a target out there of scope 1 and 2 reductions of 50% by 2,030 compared to where we were in 2016 and Very pleased by the fact that we've gotten past 30% already, with no utilization of credits for the Scope 12, no offsets, I mean. And we have a pathway to be able to achieve that 50% without a huge amount of dependence on nature based solutions. But absolutely, CCS will be a core part of it because beyond what you can do to abate the emissions somewhat through High grading operational measures and the like. You do need CCS for the bulk of the next wave of reductions, both for Shell and for others. And so continue to be a believer that CCS will play a critical role as it has in other parts of our portfolios, whether it's in Canada or The project that we're doing in Norway called the Northern Lights project with Equinor and Total.

Speaker 2

In Scope 3, Ultimately, this is all about where our customers want to go. And what we're trying to do on Scope 3 emissions is to be able to build low carbon value chains, But the customer needs to be there to be able to buy into those. Now some customers are preferring to package our products with carbon offsets. That's a choice. We will be offering more and more of the lower carbon products.

Speaker 2

So something like our green hydrogen facility in the Netherlands will one day be able to offer Green Hydrogen Molecules, we offer bioproducts to our customers, but the customer ultimately will need to choose how they want to be able to achieve Their own balance of profitability, emissions and the like. And so what we see ourselves doing is really offering the choice And looking to continue to, as much as possible, make that attractive for our customers. Let me pause there. Sure.

Speaker 1

Indeed. And thanks, Amy, for the question. In terms of sectors and decarbonization, you say it's a small part of Shell at the moment, and it is. But it's an incredibly valuable part in terms of where it can go to in the future, particularly. I certainly wouldn't look at it quarter on quarter.

Speaker 1

It just, it doesn't play out because actually a huge part of what they do, of course, is reacting exactly as well as talking about In terms of what the customer needs are, so you do see lumpiness in it. So in terms of the volumes in particular, we tend to react in terms of what the customer needs in those There's different delivery, etcetera. This is one that is going to grow, so I'm very comfortable in that. And you've seen Nature Energy, of course, come through. We just completed it, so you don't start to see those volumes come, but let's talk about that later in the year as well.

Speaker 1

But that, of course, completed in Q1, and we look forward to seeing its output Its growth trajectory as well.

Speaker 2

Thanks, Sinead. And thank you for that, Amy. Dan, if we can go for the next question, please.

Speaker 3

The next question is from Irene Harmona at Societe Generale. Please go ahead.

Speaker 9

Thank you. Good afternoon and congratulations on the results. I've got a couple of questions left. First of all, A specific one on cash again. Can you help us appraise at all the risk behind the Reported state request for compensation from the consortium.

Speaker 9

And secondly, on capital expenditure, you continue to guide We're an unchanged range, €23,000,000,000 to €27,000,000,000 I appreciate this question may be answered in June, but I need to ask As we're approaching midyear, are you not able to pin down the number a little bit more accurately? Thank you.

Speaker 2

Great. Thank you. Do you want to start with the second question on

Speaker 10

Sure.

Speaker 1

No. Thanks, Elena. Thanks for the questions indeed. So as you say, 23% to 27% in terms of the range that we're guiding towards. What you see, of course, is that we're very focused in terms of value.

Speaker 1

So we will take the opportunities that come towards us only in terms of the value lens, and you've seen that discipline coming through whether where, particularly as Wael has discussed, Stepping back from certain projects as well. So you saw some of the ones he mentioned previously related to Booker and then some other ones as well that came through from different questions. So what I would say on that in a sense of 23 to 27, we're very comfortable with. We know that will give us the opportunity to deliver against our strategy And to see what other opportunities come there which have strong, strong value focus, that will be where we go. It will not be a buy providing numbers above that.

Speaker 2

Thanks, Sinead. And Irene, to your first question around Kazakhstan and Kashagan specifically, indeed disappointing to see The request for compensation, but not hugely unexpected. We've had challenges in the past. And I think It's fair to say that we have typically resolved them amicably with the Kazakh government. I suspect the same will happen here.

Speaker 2

I do think we continue to be a major player, of course, in Kazakhstan. We have not just Kashagan, but also Karachaganak. We're making big investments in the country. I've had the opportunity to go there this year, and I'll be going back again later in the year. And I think there's a very clear understanding that we have the opportunity to continue to grow on the basis of A stable and secure investment climate.

Speaker 2

The international or the foreign partners are joined up in our conviction that there is Very little basis for the request for compensation. And we'll go through the appropriate channels, both commercial discussions and if needed, from the legal perspective as well To be able to defend our rights, but I do hope that we can resolve this in the right way. Thank you for the question, Irina. Dan, if we can go to the next one, please.

Speaker 3

The next question is from Alastair Syme at Citi. Please go ahead.

Speaker 11

Hi. Well, Sinead, I wanted to understand where you're seeing unit development costs Now across the upstream and integrated gas business. I asked because since the Q4 call, you've filed the annual report and the annual filings Show that you're sort of 3, 5 10 year F and D costs remain stubbornly over $20 a barrel. Yeah. I think you're telling me that you know that all the costs are lower than this, but I just worry that the annual reporting numbers are not coming down or aligning So our underlying development costs are probably, maybe if you can help reconcile that.

Speaker 2

Great. Alastair, thank you for that. Do you want to address that?

Speaker 1

Certainly, Indeed. Thanks for the question, Alastair. And what I would say is we're spending a huge amount of time focusing in on costs across the group, making sure that we are competitive In everything that we do and making sure that we really are disciplined about where we spend our dollars. That is across groups. So it's also in, as you say, the development Space as well.

Speaker 1

We've had a very good track record in terms of driving these down. Is there more to do and more opportunities? Yes. And we look forward to going after those. Of course, it's very difficult when you look at it across the different types of businesses, but specifically even across the upstream business itself.

Speaker 1

So there are different types of wells, different types The fields, etcetera, but we are continuing to drive those down as well.

Speaker 2

Thank you, Sinead. I'll also thank you for the question. Dan, can we have the next question, please?

Speaker 3

The next question is from Biraj Borkhataria at RBC. Please go ahead.

Speaker 12

Hi there. Thanks for taking my question. 2, please. The first one's on the credit rating. So you're A plus And your slides have noted several times that you want to aim for AA credit metrics through the cycle.

Speaker 12

I'm just trying to understand If there's any sense of urgency here, if I look at your balance sheet, it's always difficult. But if I normalize for things that you don't have relative to peers like hybrids and so on, Your balance sheet is actually cleaner than most of them. But if you're looking for a AA credit rating, does that Is the implication that you're looking to sit in a net cash position over time? Any comments around that would be helpful. And then the second question is an easy one, but the Pennsylvania cracker in a mid cycle Chemicals environment, what would you expect the earnings contribution to be from that project?

Speaker 12

Thank you.

Speaker 2

Thank you for that, Biraj. Did you want to take both of those?

Speaker 1

Sunny, on the first one, Berj, and thank you for that for doing the hard work to actually do a proper comparison across the different our peers as well. So I recognize that as well. Indeed, it is a healthy balance sheet and something that we've been focused on over the last couple of years, ensuring that that is the case. It Just gives us freedom, as you say, for whatever the circumstances might be. Specifically around the credit rating, I would say, if we look at the credit rating in its entirety, AA isn't, of course, where we aim towards.

Speaker 1

But of course, you can see what our priorities are as well. We sit comfortably within the metrics range. Course, the rating agencies will make their choice given their views in terms of the industry risks, etcetera. And they do that with all of our peers as well. You can see what our priorities are with respect to that.

Speaker 1

We've returned cash in terms of the buybacks this quarter, particularly to the shareholders. I think that's where I would focus. In terms of the net debt level, you can see it coming down where we feel it's fit. It's about proper capital allocation at the end of the day. And I'm quite comfortable with the levels we're sitting at at the moment.

Speaker 1

But no, I don't particularly have a focus on the net cash position. Thank you.

Speaker 2

Thanks, Sinead. And maybe I'll just pick up the Paycom one. That's What we expect Biraj there is this to be a robust asset going forward. I don't know if we disclosed the numbers, but I think this is a healthy asset in the $1,000,000,000 plus earnings range is what we would expect in a normal year. And I suspect, Of course, a lot of it is tied to what the macro looks like.

Speaker 2

But this is a really differentiated asset. We like the fact that we are uniquely positioned In that supply envelope, roughly 2 thirds of industry is around that specific asset. So we can get there From an advantage perspective compared to some of the competitors in the Gulf Coast, and of course, we have access to Nicely priced gas in that area. So by and large, this is an asset that should be able to outcompete and is well positioned to do so.

Speaker 3

The next question is from Paul Cheng at Scotiabank. Please go ahead.

Speaker 10

Thank you. Good morning or good afternoon your time. Two questions. One is maybe a little bit granular. Looking at your E and P gas price realization, I was actually surprised How strong it is, given that the European spot gas price is probably down about $15 And the U.

Speaker 10

S. Henry Hub is probably down about 3. Can you help us try to reconcile why that your 1st quarter gas price realization so strong there. Is it under some kind of lag effect or some one off adjustment? Second question, I want to go back into CapEx.

Speaker 10

I mean, you gave a range of $23 to $27 At 7,000,000,000 for both including organic and inorganic, could you give us a range What is the organic piece it's going to look like? Thank you.

Speaker 2

Thank you. Let me pick up the second one and then maybe if you can answer the first one. We don't separate it, Paul, and I hope you'll appreciate. We want to make sure that we are deploying that Capital in the best way for our shareholders. Sometimes that involves small acquisitions and sometimes we preferentially go towards an organic investment.

Speaker 2

It's fair to say that the big bulky one, the $2,000,000,000 Nature Energy acquisition sits within that $23,000,000,000 to $27,000,000,000 range. But when we do guide for that, as you rightly say, we have guided for organic and inorganic within that range this year, with the big one being Nature Energy.

Speaker 1

Yes. And very simply put on that one, Paul, it's all about very highly localized markets and very much localized prices. Of course, the relevant contracts that are in place, I wouldn't go into much more detail on that, particularly on our contracts. So apologies for that.

Speaker 2

Thanks, Sinead. And Dan, if we can go to the next question, please.

Speaker 3

The next question is from Henri Patricot at UBS. Please go ahead.

Speaker 5

Yes. Hello. Thank you for taking questions. 2, please. The first one, on the buyback and purchase of the CMD next I was hoping you could keep some further comments on the background for keeping the buyback flat this quarter despite lower cash flow, We can macro at the moment.

Speaker 5

And then secondly, thinking about the cash flow generation of the rest of this year, working capital movements have been Quite significant the last few quarters, this time not so much. Is there anything we should have in mind in thinking about working capital movements We'll address this year beyond the macro changes. Thank you.

Speaker 1

Both yours? Yes, happy to. Thank you, Henry. Indeed, I would say we have definitely in terms of utilized outstanding performance from our businesses to ensure we have compelling returns For our shareholders this quarter, I would hope you recognize. What we do in terms of the distributions, of course, is very much the original frame that we've talked about before, so that 20% to 30% in terms of distributions around CFFO.

Speaker 1

Now of course, what that means is that In terms of distributions around CFFO. Now of course, what that means is, we've talked about it, that soft ceiling and the hard floor comes into play. And it depends then, of course, on A large bit of pragmatism that has to come in. We have to look at it not in terms of isolation across several quarters, of course, Because there are those variations that you rightly bring in your second question, Ryan, working capital and many other things that play out. So we look at it in terms of what we see in terms of Performance on what do we have in terms of the macro coming through as well, and that's how we make the decision.

Speaker 1

So I would say, yes, if you look back to the previous quarter, of course, Sitting at some £21,000,000,000 of cash flow from operations compared to, as you said, you described as weaker in terms of 14,000,000,000 I would say strong cash flow is the way I would put it, Henry, In terms of this quarter, of course, last quarter what we saw were some unusuals in there with deposits from joint ventures, etcetera. And we warned that that would reverse as well. So if you look at it across both quarters, what you're seeing is, in effect, much more of a pragmatic decision that came across. What you see is above 35% of distributions coming of CFFO coming across. That was your first one.

Speaker 1

In terms of working capital movements, I would keep it very simple. This is about all of our capital allocation decisions. We make sure that we allocate what is appropriate for what we see the potential value that comes through. Of Of course, there are some unusuals that happen in that in terms of different things that will occur in terms of as price falls, what occurs in terms of the inventory levels, etcetera. But I wouldn't predict where it's going to go later this year.

Speaker 1

It will very much depend on where prices go to and where we see opportunity to truly generate value. Thank you.

Speaker 2

Thanks, Sinead. And thank you for the question, Henry, as well. Dan, if you want to go to the next question, please.

Speaker 3

The next question is from Christopher Kuplent at Bank of America.

Speaker 13

My questions have been asked, But I'll try anyway. Sorry for wasting your time. I hope I'm not. On CapEx, You mentioned Nature Energy and indeed it's already in your Q1 number, right? So what we're actually seeing is ex Nature Energy, a run rate below 5,000,000,000.

Speaker 13

Should we assume, a famous question, that therefore your current run rate organically looks At a full year of €20,000,000,000 and you're sort of leaving yourself M and A headroom? Or are there a certain number of project phasings That you'd like to make us aware of, whether it's FIDs that you're planning that are still ahead That you can already see today. I'm obviously not asking about future M and A announcements. And then secondly, Again, without wanting to touch on CND messages, but again, Sinead, perhaps you wanted to give you the opportunity to highlight to us why yet again You feel happy going over and beyond your 20% to 30% payout ratio? Thanks.

Speaker 2

Want to hit both?

Speaker 1

Sure. Thanks, Chris. And very happy to take both of them. So in terms of the CapEx number, you're correct that we actually are looking at Some GBP 6,500,000,000 for this quarter, and it does include Netra Energy. But please don't assume that subtracting it and then multiplying by 4 is indicative of where we will end up.

Speaker 1

If you look back at time, you'll see that we typically are a lot lower in Q1 in terms of our CapEx, so it is not indicative of where you would expect us to end And we do have a number of things that will come through in the course of the year. We've already spoken about, of course, some of the FIDs that are coming. So as you start to see different aspects, different projects And the development of those coming through, so as whale continues to spend, as we see Jackdaw continue to spend, etcetera, you will see that Flowing through as well. So I would not suggest that it is indicative. I would say there are other aspects in there as well.

Speaker 1

We've entered into things like if I look at our res space, Battery storage in Australia, you'll start to see that phasing coming through as well, which isn't there in Q1. So please don't take it as a historical number in any way. And no, it's not about building for M and A headroom at all. So I would definitely say confirm that. In terms of why do I feel comfortable, your second question, in terms of being above the 20% to 30%, I mean, it's very much about performance.

Speaker 1

So again, as I would go back to Chris, As we go through that decision point, we're looking at to make sure we're not doing it in isolation. And there has to be some pragmatism in this, which I'm sure you understand. What we're looking at is do we truly believe in the performance of this company that we can deliver on that buyback at this point in time? And do we believe in where the macro is going to? So how does that position us Cross it.

Speaker 1

With a healthy balance sheet, operating assets sorry, assets operating incredibly well, it gives us the confidence to do the $4,000,000,000 of buyback. Hope that helps.

Speaker 2

Thanks, Sinead. And Chris, thank you for the question. Dan, can we have the next question, please?

Speaker 3

The next question is from Lucas Hermann at Exane. Please go ahead.

Speaker 14

Yes. Thanks very much and good afternoon both of you. A couple of them, Mike. Sinead, I wanted to go back To Biraj's question, first of all, and try and understand how you think about the operating lease component of debt. Yes.

Speaker 14

Clearly, it's the majority of your debt or operating finance leases, the majority of your debt. And it's really just to get a sense of, I guess, ultimately, where you feel bank or Commercial debt, what level you we should be thinking about you driving towards, as I think I've said in the past, Quite difficult to get a sense from this side. So that was observation, number 1. But the second, and I Again, if this is more appropriate for Capital Markets Day, but if I look at the build in some of the transition growth businesses, EVs, biogas, biofuels, others, Clearly, you're putting quite a lot of capital cost in. We can see returns deteriorating across some of the divisions.

Speaker 14

I suspect those reasons. You're also obviously putting quite a lot of operating costs in. How do we get a sense of the extent to which the underlying performance

Speaker 10

of the existing businesses Is

Speaker 14

I'm going to use the term suffering or certainly the headline numbers are suffering as a consequence of operating and CapEx growth And in part, it's almost what's the scale of the OpEx and CapEx growth spend at this time. That was it. Thank you.

Speaker 2

Thank you for those questions. Lucas, do you want to take the first one? I can take the second one.

Speaker 1

Certainly. Absolutely, Lucas. So indeed, when you look at leases, again, I apologize. I feel like I'm repeating too much, but it really is just about the value side of things. So we discussed it actually as part of our capital allocation as well.

Speaker 1

So In the same way as when we, when we we've talked before about our sort of, capital investment committee and the teams come to us With, opportunities, we do the same with large leases as well. So a huge number of our leases are related, of course, to our midstream and particularly Around integrated gas, as you can imagine, particularly around the vessels, etcetera. So we take those from the point of view of just value. So it doesn't make sense to lock in now, same with some of our FPSOs, etcetera, When we make the call to lock in now versus different things that will come in the future, it served us very well-to-do so. But that's really the focus that comes in on that.

Speaker 1

I think, Lucas, the second bit, which I'm certainly not avoiding, but, you asked about, you know, is there a level that we should look at? For me, there isn't. I fundamentally am comfortable with where we are in terms of our debt level at the moment. Now will I see opportunities to take a down? And you saw that.

Speaker 1

You saw us reduce Last quarter, you see us reduced smaller amount this quarter as well. But I'm also very comfortable if our debt level has to go up as well We'll do it linked back to that value conversation. So if you remember in Q3, many comments about the performance in Q3, but particularly our debt level did go up. It was for a very good reason. We were very comfortable.

Speaker 1

And you can see the performance coming through, particularly from Integrated Gas in Q4 and Q1 accordingly. So I'm comfortable that my debt levels will merge. But I would say just back to that first one on specifically on the operating leases, it is very closely managed and is very much a focus as well.

Speaker 2

Thank you for that, Sinead. Lucas, on your broader question, I think a few things to point out. 1, From a strategic perspective, we're absolutely convinced that biomolecules, Green electron based molecules eventually and so on will dictate a premium in the market. And we see that actually in a number of different markets. I mean, Our bio business has been doing very, very well, driven largely by regulatory requirements, right?

Speaker 2

So compliance requirements, But also increasingly through voluntary demand by certain enterprises that have made net zero commitments. So there is a very attractive market. Now like any investment profile, you're going to have to put some of that capital upfront. Profile, you're going to have to put some of that capital upfront. And here, we need to be very conscious and very transparent around where we are deploying that I hope you see that.

Speaker 2

But indeed, Capital Markets Day, we can talk a bit more about the specifics across the different segments. And we need to be very conscious of the OpEx. And I've already said, and I think Sinead has also said, we feel that the OpEx is on the heavier side at the moment. So we are very Focused on how we are going to be able to manage the allocation, not just of the CapEx, but also of the OpEx. And we will continue, of course, to Refine the transparency of the numbers that we are sharing with you to give you the sorts of insights that allow you to determine whether we are Appropriately investing shareholder capital, which I can assure you we spend a lot of time on internally, not just in terms of the decisions we're making, But a lot of look backs on the wisdom of the choices we're making, what can we learn and how can we optimize and improve going forward.

Speaker 2

And you will see more and more of that come through. But it is a critical piece that we're going to have to accept That to be able to create those sustainable returns that are going to come in the latter part of this decade, we need to make some investments right now. We need to be measured, we need to be choiceful, but we also need to be very clear that we see pathways towards double digit returns for those investments, Which is what we are very focused on when it comes to the Capital Investment Committee in Shell. Thank you for those questions, Lucas. And then if we can go to the next question, please.

Speaker 3

The next question is from Henry Tarr at Berenberg. Please go ahead.

Speaker 14

Hi, and thanks for taking my questions. 2, one is just on Chemicals, Which is clearly sort of cyclically weak currently and you have the cracker in Pennsylvania ramping up. But what's the outlook for the utilization of assets and margins there? And what are you aiming for as all of the assets do come back on in terms of So returns through cycle. And then secondly, just in terms of operating costs, I think you talked about those a little bit.

Speaker 14

Are you seeing inflation currently coming through the supply chain? Or is that moderating

Speaker 10

at this point? Thank you.

Speaker 2

I can take the second one if you want. And you want to talk about Chemicals?

Speaker 1

Sure. Happy to. In terms of The chemical side of things. So indeed, we saw margins actually improve, of course, this quarter, largely due to the sort of lower prices on feedstocks there, Henry. But indeed, I think where we will go to because you asked specifically about utilization going forward, we've provided some of the guidance in terms of The quarterly update notes, so you'll see that coming through as well.

Speaker 1

We don't tend to advise on the or give forward looking on the specific assets. But Of course, it will be purely about economic optimization. So we will ensure that if it's looking like there's great margins, we will try to keep those assets up. If it is not, we will ensure that it is about an economic decision in the same way as we looked at this quarter, ensuring that Norco, so our refining side of things, we saw Norco Stay up this quarter, and we will push the maintenance to later. So those will be the decisions that we will make.

Speaker 1

I think your second part of the first question was returns through the cycle. And indeed, It's very much focused on ensuring that we have a robust level of return, which is acceptable for each of these business. You know where we go to on this. We've given those IRRs as we've come through before as well.

Speaker 2

Thanks, Sinead. Henri, on the OpEx question, we do see pressures coming through. 10% to 15% is on average what we're seeing, but I think that's a bit of a blunt instrument because, of course, it depends on the category. Our scale helps here. So we're leveraging significantly our supply chain organization to be able to use the weight and the demand of Shell To mitigate some of the impacts of that, so it's coming in below 10%, but that's because of the many levers that we have to draw on.

Speaker 2

But once again, I think it's very local. It's very circumstantial. We pick up. We're no longer, for example, in the Shell's patch in the U. S.

Speaker 2

We recognize that seeing a lot more inflationary pressure in parts of the Middle East where we are making investments and where we have Day to day OpEx, we don't see a huge amount of bump up, and Europe is indeed experiencing a bit more inflation. So it is very circumstantial. And our weight and our size, I think, allows us to be able to manage it. But also, we're being very choiceful around where do we continue to Cut back in areas that we no longer see running room for ourselves so that we can actually redeploy our scarce OpEx Into the areas where we can find the biggest bang for buck for the future. So being very choiceful around it, a bit like what we're trying to do for the CapEx, of course.

Speaker 2

Thank you for the question. And Dan, if we can go to the next question, please.

Speaker 3

The next question is from Kim Fustier at HSBC. Please go ahead.

Speaker 15

Hi, good afternoon and thank you for taking my questions. I have 2, please. Firstly, I'd like to follow-up on the cancellation of the DuPont conversion projects. Are you able to give any more detail on why you pulled the plug? Was it the costs associated with the conversion project or the location or the lack of feedstock in the region?

Speaker 15

What do you now intend to do with that facility? And In terms of your staff production target that you had by 2025, I think, do you believe you're still on track to hit that target? And secondly, could you provide an update on Nigeria? I think oil production in the country had recovered over the past year or so, but we've See more outages in the last few weeks. So what's the latest there, both on the oil side and the LNG side?

Speaker 15

And then anything on the potential disposal? Thank you.

Speaker 2

Okay. Thanks for that, Kim. I'll take the first one if you want to take the second one now, Sinead. I think on your question there, Kim, around Bukham, so that's our Singapore facility. It's Refinery there, and we have right next to it Jurong, which is our petrochemical complex.

Speaker 2

And we had been developing for 2 particular projects. 1 was a HEFA plant, so bio for sustainable aviation fuels. And the second one was a So unit has feedstock to our lubricants business. And we developed the plans for it. But Ultimately, the economics were simply not robust enough.

Speaker 2

Biggest reason for the bio plant was the fact that Actually, in Asia, we don't yet see the regulatory requirements in place that would potentially Create the price points that would make this an attractive investment to make. We see those, for example, in Europe, where we are In a similar plant at our Pernice facility in the Netherlands. So you need the market to be able to be there, and we were simply choiceful in our allocation of capital. If the market isn't there, we're I'm not going to simply invest that capital hoping it's going to come. And similar calculus on base oil.

Speaker 2

So both of them, I would say, were Very specifically project specific economic decisions that we made in that regard. Of course, our staff are running the much broader facility that we have there and continue to do so. And of course, we continue to look at how we can optimize Our margins in those facilities pulling on all the levers we have, both on the top line as well as on the bottom line.

Speaker 1

Indeed. And thank you for that, Kim. In terms of Nigeria, so I would start, first of all, with the fact that we have, of course, we've discussed our intent In terms of exiting from the onshore oil side of that business, so that intent is, of course, there. We stand behind that. Of course, it is currently paused given some of the Given specifically the injunction and the court case, but that is the intent and nothing has changed there.

Speaker 1

In the meantime, we continue to operate Safely and efficiently, the assets through the joint venture that is there, SPDC, which is the onshore joint venture. So what I would say is the team are working very hard to ensure there's appropriate Delivery on the oil side, and of course, we are blessed with many partners in the NLNG business, which is very attractive, as we go through at the moment. Beyond that, what I would say, of course, is I think you're alluding to some of the activities that, particularly with some of our peers in terms of offshore. I would leave that to the operator to comment on specifically. So once again, we're very much focused on those assets where we operate, making sure that we deliver.

Speaker 1

We're making sure that we bring the performance up increasingly. That's what you're seeing in terms of the results, which is what is driving the results that we had, Which are outstanding this quarter and allowing us to be able to give those compelling returns to our shareholders as well.

Speaker 2

Thanks, Sinead. And Kim, thank you for that, What ends up being the final question. And Dan, thank you for taking care of us today. Thank you all for your questions and for joining the call. We wish everyone a pleasant end of the week and hope that you can join us at our Capital Markets Day 2023 next month in New York.

Speaker 2

Thanks all.

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Earnings Conference Call
Shell Q1 2023
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