Shell Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2024

There are 16 speakers on the call.

Operator

Welcome to Shell's 2024 First Quarter Results. It's been nearly a year Capital Markets Day when we showed you our plans to deliver more value. And in March, our energy transition update shows how we will do that with less emissions, demonstrating our commitment to being a net 0 emissions energy business by 2,050 whilst delivering enhanced shareholder returns. As we continue to turn our plans into action, I'm pleased that 2024 is off to a good start. We delivered yet another set of strong operational and financial results in the Q1.

Operator

In Upstream, our conventional oil and gas business performed very well with many of our core assets delivering high controllable availability. We also started production at our Rydberg field, which is connected to our Appomattox production hub, reinforcing our leading deepwater position in the Gulf of Mexico, where our oil production has some of the lowest greenhouse gas intensity in the world. This is another project that supports the energy security the world needs and underpins longevity of our cash flows. At Shell Polymers Monaca, our petrochemicals plant near Pittsburgh, we have successfully ramped up full operation in Q1 and are on a pathway to longer term stability. In our Renewables and Energy Solutions business, we have strategically diluted part of our stake in the Texan Brazos wind farm whilst keeping access to 100% of the offtake as part of our integrated power strategy.

Operator

This allows us to build on our strengths and leverage our world class trading and optimization capabilities. We continue to focus on maximizing the value of every electron and molecule to help us deliver on all our targets. Moving on to our financial results. We continued to deliver strong results in the Q1 of 2024. Despite above average well write offs, our adjusted earnings were $7,700,000,000 and we generated $13,300,000,000 of cash flow from operations, driven by our consistent focus on performance.

Operator

In the Q1, we had high liquefaction volumes coupled with strong seasonal trading and optimization in our Integrated Gas business, even though market conditions were less favorable than in Q4. In Chemicals, we saw marked improvement in performance compared with previous quarters and we still have potential for further growth. And it was a strong quarter for our products business, particularly in trading and optimization, where we were able to capture high margins due to global product supply disruptions. Moving on to our financial framework. We continue to be disciplined about our capital spend and our balance sheet is strong.

Operator

Regarding shareholder distributions, today, we have announced another $3,500,000,000 share buyback program, which we expect to complete by the time of our Q2 results announcement in early August. That brings our expected shareholder distributions for the first half of the year to well over $10,000,000,000 This demonstrates how we generate attractive shareholder returns in line with our guidance of 30% to 40% of our CFFO for shareholder distributions through the cycle. So to summarize, Q1 was a good start to the year, a quarter of strong operational and financial performance. And for the rest of 2024, we will keep driving performance, focus on our strengths and continue to deliver more value with less emissions. Lastly, there's an important upcoming event for your calendars.

Operator

Our Annual General Meeting 2024 is on May 21st. We ask our shareholders to support our energy transition update in which we outline how we continue to make good progress in reducing emissions from our operations whilst investing in areas where we have strengths. These investments are helping our customers to decarbonize. And with this in mind, we have set a new ambition to reduce customer emissions from the oil products we sell by 15% to 20% by 2,030. Therefore, we ask our shareholders to vote against the alternative resolution.

Operator

By doing so, our shareholders will be endorsing this management team, our Board and Shell's aim of being the investment case through the energy transition. Thank you.

Speaker 1

You.

Speaker 2

And listen attentively to their telephone audio as we begin to progress through the telephone questions.

Speaker 1

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 focus on operational performance. Today, Sinead and I will be answering your questions. But first, I'd like to just take a moment to thank Cirk Hausinga for all the work that he has done for us here at Shell. Cjerg has had a 35 year career, a very impressive career, and has been pivotal in integrating the external market perspective into our strategy.

Speaker 1

So we thought we would wish him well with a very strong quarter and thank him for all the efforts he has put in. And now if we move to the questions, Luc, can we please have 1 or 2 questions, please, from every person on the call, and I hand it over to you, Luc, to let us know who the first quarter is. Thank you.

Speaker 3

Our first caller is Michele Della Vigna from Goldman Sachs.

Speaker 4

Thank you very much, Wai and Shneur, and congratulations on the strong deliver. And thank you, Chirik, for all of your help over the years. I wanted to ask you 2 questions, if I may. The first one is, if I look at the delivery in this quarter, you've strengthened your balance sheet by $3,000,000,000 at a time when most of your peers actually increased the gearing. I was wondering what would give you at this point the confidence to increase the buyback from the current level and take advantage of the really cheap valuation to continue to buy back shares and accrue value per share?

Speaker 4

And then my second question is about the growing debate about relisting in the U. S. For some of the European oil companies. I've seen your comments. Total Energia has commented about it as well.

Speaker 4

I was wondering if you could walk us through perhaps what you think would be some of the benefits, but also some of the hurdles in considering such a potential material move? Thank you.

Speaker 1

Great. Michele, thank you for that. Sinead, do you want to take the first one? I can take the second.

Operator

Certainly. And indeed, Michele, what you saw was us put SEK3 1,000,000,000 towards the balance sheet this quarter. Of course, there's a couple of reasons about that. First of all, in this quarter, what we saw, of course, was fantastic operational performance, which drove good cash flows. So that gave one part of it.

Operator

We saw lower CapEx, of course, give a little bit of a bump in terms of the free cash flow, but also of course in terms of our distributions, in terms of the buybacks, in terms of the phasing of them, a little bit fell into April. So there was a little bit more that came through. What we do, of course, with the balance sheet is and with debt, you see our debt fluctuate a little bit. We use it to demonstrate value whenever it comes through. But fundamentally, your question is really about distributions and the choice to do SEK 3,500,000,000 of share buybacks this quarter.

Operator

As you know, we tend to look through various quarters. And what you saw, of course, in the past couple of quarters is we've had quarters with lower CFFO. And fundamentally, I've still done SEK 3,500,000,000 of buybacks at that point in time. So we're now at 10 quarters where we've done buybacks of at least $3,000,000,000 So you see the pragmatic approach coming through and see some form of consistency.

Speaker 1

Thanks, Sinead. Michele, to your second question around the real estate. I think firstly maybe just to sort of split it up into 2. I think let's start with the fundamentals, the valuation of this company. And what we have said in Capital Markets Day last June is our focus is on how we're going to grow those fundamentals, both on the free cash flow side, absolute, as well as the free cash flow per share, the latter being something we want to grow 10 plus percent per annum through to 2025 and the former all the way through to 2,030, growing it at roughly 6% per year.

Speaker 1

That is what our focus is. So what we have said is performance, discipline and simplification are at the core of what we need to be driving. And you already see through this quarter, for example, the outcome of that. You're starting to see more stability on the operational performance. You're starting to see the cost move in the right direction.

Speaker 1

You're starting to see the discipline on capital start to shine through. And of course, all the subsequent benefits of a stronger balance sheet and so on and so forth. That is what the focus and that's what the priority is. Then there's a second bucket, which admittedly we acknowledge that we see our share price as being below what we think is a fair market value at the moment. And what we are doing there, again, what we said in Capital Markets Day, we were going to do is to continue to lean into buybacks.

Speaker 1

And once again, here's another $3,500,000,000 buyback for this quarter, which I think underpins that commitment that we have going forward. The simple relisting is not going to address the first point around the fundamental valuation. It could potentially play a role in this disconnect that we see. But for now, what we're focused on very much is the buyback. And so, of course, as a management team, we have a duty of care to continue to look at all opportunities to bridge that valuation.

Speaker 1

And so we will always have something like a listing or other elements under review, but I can tell you it is not a live discussion at the moment for us. Our absolute focus is on driving the strategy, more value with less emissions to make us that investment case through the energy transition. Michele, thank you for the question. Luc, can I have the next question, please?

Speaker 3

Our next caller is Biraj Borkhataria from RBC Capital Markets.

Speaker 5

Hi, thanks for taking my questions. The first one is just on the LNG segment. It's encouraging to see the LNG volumes at the top end of the guidance after you narrowed it with the trading update. But I noticed that in addition to the higher volumes, gas realization in Integrated Gas was quite a bit higher than I would have expected. Last few quarters, it's been quite predictable.

Speaker 5

And I guess the big change is Prelude quarter on quarter. So is that what is driving can you just talk a bit about what's driving that? That would be helpful. Or if it's something else? And then second question is on OpEx.

Speaker 5

You just highlighted you continue to drive it lower. I was just wondering at the group level, can you talk about the difference between the structural cost reductions of what you're seeing relative to the inflationary pressures that are coming through because the net result is lower. But I was trying to understand how you think you're performing on the controllables. And then maybe a cheeky third question, but you've removed some of the disclosures on mobility. I'm just wondering why that was.

Speaker 5

Thank you.

Speaker 1

Okay. Thank you, Biraj. Do you want to take those, Shailesh? Sure.

Operator

On your first one, Biraj, so actually, let me just take the last one. It was a really quick one. Just very clear, we're trying to simplify everything across the organization at the moment. So we looked at our disclosures, which are quite extensive, as you probably know, looking at our data book in some detail. And we looked at which ones are actually used most and where do we get the questions.

Operator

So we simplified across everything. It's basically bang for the buck, how much effort does it put into ensuring that we have all of these up to date, etcetera. So nothing more than that. On the LNG side, you asked about in terms of the realized price. You're right, you saw that a change between, I think it was $8 $9 You saw that coming through on the realized price.

Operator

Really simply put for us. What you see, of course, is that we're quite heavily in terms of Brent price or oil priced markers on some of this. So some of them are oil, some of them are pure JCC and of course, others are gas priced. But in Q1, what we saw was, of course, Brent relatively flat, but JCC with that lag that really played through now and that completely over weighted or compared to or covered for in effect the slightly weaker gas prices as well. That's what played out.

Operator

On the OpEx side in terms of just where are we in terms of differences in structural performance, etcetera, You saw OpEx come down this quarter. You're right. But I would say remember this phasing. So you always see in terms of us Q4 OpEx going higher. Just to remind you on that, of course, Q4 is always decommissioning and restoration updates come through, a few on bonuses and largely, basically, people billing us towards the end and that comes through as well.

Operator

So we're seeing good progress and we talked about it at Q4 of DKK1 1,000,000,000 of the total of DKK2 1,000,000,000 to DKK3 1,000,000,000 that we had talked about. Where are we seeing it come out? We'll do another update for you at the end of Q2 and walk you through some detail on that. But we're seeing good progress. It's beginning to filter through the organization.

Operator

You already saw the portfolio side of things, the where we play. Now how we play in terms of structural change is coming through. It's a simplification. 1 of the ones I just gave you earlier in terms of what we disclose, what we spend our time on and trying to focus on that which makes most sense. So you see us simplify, try and speed up accountability and make sure the business is focused on what it should be, which is really about delivering value at the end of the day.

Operator

And each part of that is different per asset.

Speaker 1

Thank you, Sinead. Biraj, thank you for those questions. Luc, can we go to the next question, please?

Speaker 3

Our next caller is Lydia Rainforth from Barclays.

Speaker 6

Thanks and good afternoon to you both. And clearly, very, very good 1Q. But just an observation, 1Q does tend to benefit from better trading volumes, which don't always repeat in 2Q, 3Q. So can I just talk to you what we can expect from that Sprint 1 program that really keeps the momentum going for Shell into the rest of the year? And I suspect probably linked to that.

Speaker 6

On the cost base, just coming back to Ashnade, I think you're introducing a new process as of July this year in terms of that kind of Seam approach in terms of really simplifying things. What sort of impact do you expect that to have? Thanks.

Speaker 1

You want to take those 2?

Operator

Sure. In terms of yes, so Lydia, the comment of Q1 tends to be higher. So there is that element for us with Q4 and Q1. We are skewed towards, particularly from a trading point of view, the Northern Hemisphere winter for our LNG business. However, what I would say is actually some of the trading optimization, which you referred to, plays out at different times.

Operator

Actually, just different aspects come through. So there are elements, for instance, of maintenance that play at different times. So you see maintenance heavier in 1 quarter than another, but you also see seasonality around, for instance, driving season. So we would expect to see, of course, our marketing results come up with driving season increasing within the U. S.

Operator

As well. We then see, of course, beyond that, we see different things like, for instance, for loops. It tends to be about industrial maintenance and industrial activities. So for instance, Q1 tends to be a little bit higher and we see Q4 also higher. So that spreads out across the various assets.

Operator

What you will see though and what is key here is that this is an organization who is looking to deliver on what is promised. So what you're going to see, Lydia, is us continue to be focused on quarter after quarter being distinctly boring on this and delivering on exactly what we said. So what you also see then is each asset knowing exactly what they need to deliver in terms of value and playing to that strength. So that should provide the consistency across there. And of course, you're going to see the drumbeat of further announcements coming through as we continue with delivering on exactly what we were we told you we would do.

Operator

Your second part, of course, was around cost and the pace of it and taking things out. Good catch indeed around Siemel. I think Wael referred to it last quarter as well, where we talked about changing and this is about our for others, it's about many of the standards that we have linked to the assets. What we basically said is how do we reduce those down to what is the bare minimum, what is really required to hit our values, safety and actually correct operation for the environment, etcetera. But what is needed has to be fit for purpose for each asset.

Operator

And it's not the same between an onshore asset and a deepwater asset or a mobility asset or a refinery. So that's the sort of thought process. So those SIEM standards are reducing by some 70%. But it's much more than that. It's not just that 70%.

Operator

It's then how does that take in by each of the assets to do what they think is correct. It comes down to what assets need in terms of management information, what they need in terms of staffing levels, what

Speaker 7

they need in terms of legal support, etcetera. And that's the change that you're seeing

Operator

in terms of legal support, etcetera. And that's the change that you're seeing. Each asset, each part of the business is looking at what are the risks and therefore what they need to cover those and to maximize value. So that culture change will come through and it's done very purposefully.

Speaker 1

Thank you, Sinead. Lydia, thank you for those questions. If we can go and look to the next question, please.

Speaker 3

Our next caller is Alastair Syme from Citi.

Speaker 7

Thanks, Sinead. Well, look, I'll definitely share my best wishes to check the powers of intersected on several occasions over a long number of years. And sometimes we've agreed and sometimes we haven't, but it's always been first class interaction. So I look forward to sharing a drink in a few weeks. A quick question.

Speaker 7

Where do we stand on booking? If you can give us a little update on that and then a longer one, while as you think about the strategic planning year 1, I wanted to know whether your assumptions and the competitive landscape has remained sort of broadly within your range of expectations? Or has there been anything out there that's made you tweak your plan, push or pull harder in any one or more areas? Thanks.

Speaker 1

Thanks for that, Alastair, and thank you for the kind words for Chirke as well. Did you want to say a quick word on bookings first?

Operator

Yes. One liner on that. I think we had said previously that we were going through a strategic review and that we concluded that and that our preferred option was towards divestment. We're continuing to pursue that route at this moment, and I look forward to being able to give you an update at some point in the future. You understand I can't say more than that at the moment.

Speaker 1

Great. And to your second question there, Alastair. Look, I think the world around us, of course, has continued to be uncertain and volatile. And what you have seen is a number of things. I'd say, 1, the amount of geopolitical risk that has played up, the accentuation of the Russia Ukraine issue, what we are seeing, of course, in the Middle East at the moment and the challenging relationship across the U.

Speaker 1

S.-China axis. All of it, of course, has just meant that, that volatility, that uncertainty that we had expected has been magnified, and we need to be able to adapt to that. And this is where I think it's reinforced my own conviction in the strategy that we have in something like LNG, where our ability to be able to have multiple supply points, our ability to have multiple demand points, our cross commodity exposures afford us quite some resilience when you have such volatility. Also, what we're seeing, of course, is from an external perspective is different countries are dealing with their own respective challenges, whether that's fiscal challenges, whether that is the need to step up, for example, defense budgets, health care services, and therefore, the pace of the energy transition in some of those countries is varying. And once again, I think our strength of being really focused on the global picture but then honing in on the local realities has been key.

Speaker 1

And so what does all this mean for the way that we are responding? I think we're doubling down on what we saw coming into Capital Markets Day, right? We said at the time that there are some core basics we need to continue to follow through. We need to unlock the full potential of the asset base we have in place. And I think Q1 offered us a good glimpse of what that looks like when Monarch is up and running, when Prelude is up and running and so on and so forth.

Speaker 1

We need to continue to keep that funnel of opportunities coming through LNG Canada, our Brazilian projects, our Gulf of Mexico projects. We need to continue that cost momentum and bring down the structural cost, and we need to keep that discipline. So all of those elements continue to play up in my mind and critically to contribute to the direction we're going. With all of that, we continue to see that disconnect between what our share price is and what that underlying valuation is, which is why, if anything, we have become hungry to continue to go for even more of, I think it was Martijn Rats who said eating Shell. Our ability to continue to buy back more of Shell over the coming years, when in particular, our free cash yield continues to be a comfortable double digit 1 or mid double digits.

Speaker 1

So all of that, I think, reinforces our direction and reinforces the need for that cultural evolution that we have committed to make, of which I see some real green shoots and growing in confidence that we can move at a pace even faster than what we had anticipated. Thank you for the questions. Luc, can we go to the next one, please?

Speaker 3

Our next caller is Paul Cheng from Scotiabank.

Speaker 8

Thank you. Good morning or good afternoon, your time. Two questions, please. The way that your Pittsburgh, you think correctly, you're saying that in the Q1, you're now running at full capacity. So at this point on to improve the result in that, what is the operational improvement that we should expect?

Speaker 8

Or that is just going to be a function of selling the non profitable asset and also hoping for the margin to improve? That's the first question. Second question curious that it looks like the pace of energy transition to have is going to be a bit slower than previously assumed and oil production may not peak until sometime next decade. You've been looking for your production in liquid production, essentially flat, about 1,400,000 barrels per day for the rest of the decade. Should we revisit whether that is the right target and whether that we should also eliminate the artificial ban of looking at the exploration regions outside the existing area by 2025 or 2026?

Speaker 8

Thank you.

Speaker 1

Great. Let me I'll try to cover both of those, Paul. And firstly, let me make a quick apology. My team here informed me that it was actually Lucas who said we were eating ourselves, not Martin, so I stand corrected. Paul, on your point around Mannaca or Shell Polymers, Mannaca, A couple of things.

Speaker 1

I think firstly to recognize this Q1 was one where we were indeed trying to drive up the performance of all the trains, in particular, that 3rd train, which you'd recall, had the equipment failure or equipment faulty realization, which is what we were working to improve. And now that we have been able to fix that, we have seen all three trains at or above capacity. As we go into the next quarter, it's all about reliable operations now. It's stabilizing that facility. What I'm particularly proud of, I spoke earlier about culture change, right?

Speaker 1

And this was a great example that the team in Monaca showed that this is a culture change that is no longer just top down, but actually now what you see is truly across the organization, people grabbing onto the mantra of how are we going to achieve our values and drive value. And what the team there did was you'll recall we had talked about the facility potentially allowing us to produce around 40 different grades of polyethylene. The current cash generation opportunity, given the disconnect between oil prices and gas prices, is just about flow. It's just about how much we can get polyethylene through. And so the team pivoted to be able to drive what they call a faster for longer strategy, so sorry, fewer for longer strategy.

Speaker 1

And in essence, what they're doing is they're going for a handful of grades where we know the operating envelope is working well, and they will drive that to the limit so that we can get as much volume throughput as we can to be able to generate the cash. A really nice example of how they were able to adjust to the circumstances in the market to unlock value. And so expect that to play up, expect us to continue to drive value through that as we stabilize the facility and over time continue to premiumize. This is a journey of liquids production, the pace of the energy transition is consistent with what our beliefs have been. So there hasn't been a fundamental change.

Speaker 1

This is not a new revelation. We have always said that we want to be able to be resilient to different degrees of or different paces of the energy transition simply because both the shape and the pace of the energy transition are uncertain. And so our strategy has been one that is resilient to that. And so what we have done on the LNG side is to say we are going to grow that LNG business by 20% to 30% through to 2,030. On the liquid side, on the oil production side, to your point, we see that continuing to be a delivery of around the 1,400,000 barrels per day, plus or minus.

Speaker 1

And that's a focus that we have to be able to continue to high grade and make sure that it's not just about liquids production or volumes. It's all about making sure we continue to focus on those highest margin barrels, the ones which we have enjoyed in our portfolio, the ones that have given us the leading CFFO per barrel compared to our peers And our reserve base, of course, given it is preferentially skewed towards deepwater and LNG, allows us to do more of that. On your point around exploration, look, the focus of our exploration is to tap into basins where we feel we have a true competitive edge, true competitive edge. And you've seen that in particular in the Atlantic basin where we are leveraging Gulf of Mexico, Brazil, Nigeria into a place like Namibia, and we will do more of that. So we are not necessarily constraining ourselves, but we are focusing on the areas where we have we can get the highest bang for our buck.

Speaker 1

And in a world of making sure that we are focused and constrained in how we allocate every dollar of capital, I think that's a wise move for us to continue to follow through on. Thank you for the questions, Paul. Luc, let's go to the next question, please.

Speaker 3

Our next caller is Josh Stone from UBS.

Speaker 9

Yes, thanks and good afternoon. Two questions, please. Yes, one on LNG. You've been connected in the press with a couple of transactions that would expand your LNG portfolio. I understand you won't be able to comment, but maybe more broadly, can you talk about why now would be the right time to add to your LNG portfolio through acquisition?

Speaker 9

And how you would ensure you get fair value given what it seems to be a competitive process? And second question on the departure from the power market in China. Maybe just talk about what was it about this business that led to your decision to depart? Also curious, you haven't exited the EV charging business. So is it the case that maybe you don't see the need to integrate between your power business and your EV charging business for the portfolio more broadly?

Speaker 9

Thank you.

Speaker 1

Thank you, Josh. I'll take the first one. Sinead, if you want to take the power market. I suspect I have a sense of the deals that you have referenced there, Josh, that are being talked about in the press. I'd sort of be I'd separate them.

Speaker 1

I think, 1, for example, then talked about Ruwais LNG and Abu Dhabi. That's one which Abu Dhabi is developing on a greenfield basis. I won't give any specific comments other than to say, organic opportunities to continue to grow our LNG portfolio, opportunities that potentially can add more supply points to the portfolio in attractive locations where the carbon intensity is low and the value potential is high are very much down the lane that we want to continue to grow. We have a fundamental conviction that this is not an LNG sprint of a few years, but that LNG will be required for decades to come. And this is why continuing to find those differentiated opportunities is something we will look at.

Speaker 1

We are indeed not looking at big M and A in that space. Whenever we're looking at LNG opportunities, we're looking at bolt ons to our existing portfolio where we feel that the capabilities we have, the portfolio, we have the positions that we have built up over the years would allow us to be able to unlock more value than maybe a seller would be. And so we would be looking at any of these opportunities, of course, being accretive to our overall delivery as an LNG business for Shell. I'll leave it at that and maybe leave it to you, Sinead.

Operator

I think this was quite a simple one in the sense that what we talked about with respect to power is that we will be very disciplined in this area, be very focused. And I think it was last quarter that I actually talked through that we'll stay in a select number of markets, which I referenced, places like the U. S, places like potentially parts of Europe, etcetera. And we went through that in some detail. But whilst China remains attractive, it is a very different market as well, of course.

Operator

And what you're drawing is the linkage between the fundamental selling B2B linked to EV. And those are of course very, very different. So why are we exiting 1 and staying in the EV side? So in terms of the exit, we want to stay in markets where we bring differentiated capabilities, where we have the ability to deal with intermittency, where we have the ability to use our trading and optimization capability, battery power, a range of different things. And we didn't have that skill from a dedicated perspective in China.

Operator

That wasn't one way we were going to have a capability versus somebody else. However, on the EV side, that's where our brand, our experience and our partnerships have really, really played out. Of course, China is slightly different. There's very high utilization rates compared to anywhere else, frankly, compared to the U. S.

Operator

Or Europe. And therefore, what we see is very attractive returns. But of course, that's going to change over time. So it will all depend on how policies play out across the world. But specifically to your China point, we're very comfortable decoupling what was a B2B business versus, in effect, linked to the EV side of things where, frankly, our brand plays out in a very strong way.

Speaker 1

Thank you, Sinead. Let's go to the next question, please, Luc.

Speaker 3

Our next caller is Irene Harmona from Bernstein.

Speaker 10

Thank you very much and congratulations on these very strong results. Two questions. First on Upstream, you referred to improved performance and higher controllable availability. How sustainable do you think that is? And what drives it?

Speaker 10

If you can talk around, is it a change in processes or working practices and so on? And then my second question, trading was strong in Power and Products. In your 2023, 20 F, you very helpfully quantified the contribution last year of trading for both Power and Products. Can we hope or expect perhaps a similar annual disclosure regarding LNG

Speaker 1

Look, I think firstly, on the Upstream side, a lot of work has gotten us here. This is not a question of months or even a year. This has been a multiyear journey that has gotten this level of reliability and focus across our assets. We're seeing it, by the way, in our deepwater business. We've seen it in the conventional oil and gas business.

Speaker 1

And it seems to be now really sort of coming across many of the assets. And that's very pleasing. I think it's a tribute to some of our leaders, someone like Zoe, who's leading the Integrated Gas upstream business and her Executive Vice President, who have made this operational performance an absolute key focus area for them. And what are they doing with that? They're looking at indeed the processes and making sure that the processes are pointing the different contributors to reliability in the same direction.

Speaker 1

You see it, for example, in the way that some of our projects and technology teams are working with our asset teams. We've seen it in the deepwater space recently. The objectives are much more aligned. The goals are much more aligned, and you're seeing the power of that coming through day in and day out. By the way, does that mean that all is fine?

Speaker 1

No, of course, we have a long, long way to go, right? But we are institutionalizing over the quarters, 1 quarter at a time, that real rigor in the way that we drive operational performance. An element of it is how also we reward folks, where the consistency of excellent delivery rather than just thinking about the next new project is an important part of it. I also have to recognize some of the improvements that we have made in areas like overall proactive maintenance where, for example, using some of the AI capabilities we have, we have 5,000,000,000,000 rows of data that are being fed from some 5,000,000 sensors across the organization with 17,000,000, 18,000 pieces of equipment that are feeding into it with nerve centers that are sitting in places like the U. S.

Speaker 1

And Bangalore looking to be able to create capabilities that allow or that create signals for our operators to intervene ahead of certain upsets. It's helped us in the LNG space, as I've mentioned in the past, to the tune of 1% to 2% improvement in reliability at no cost. All of that is just building that next level of rigour when it comes to operational performance and something that I think we are growing in confidence around and starting to be able to sort of embed on a much more consistent basis through the company. Sinead?

Operator

Yes. And on your trading question, Irene, one of the reasons, of course, that we disclose a little bit more in terms of the res sector, in terms of the information there is simply because we don't have as many underlying assets there. So that's why we give you a little bit of the breakdown. And of course, fundamentally across our assets, our T and O, our trading and optimization works because of the underlying assets. So it's not as though you can have one without the other.

Operator

The magic happens when we link the res. In terms huge part of that is coming from the underlying assets, slightly different in res. In terms of the disclosures, of course, what we gave you was 2% to 4% ROACE uplift for our TNO business, our TNO part of the organization. And we said specifically, which is the bit that you should probably look to, is that integrated gas or the LNG part is at the mid- to upper end of that. And of course, our oil products part is at the mid- to lower end.

Operator

So I think those are the disclosures that we've given. Thank you.

Speaker 1

Great. Thanks, Sinead. Thanks, Irene. Can we now go to the next question, please, Luc?

Speaker 3

Our next caller is Ryan Todd from Piper Sandler.

Speaker 11

Thanks. Maybe a follow-up on the comments on trading and optimization in your Integrated Gas business. As you think about the outlook over the next 1 to 2 years, given an LNG market that seems to have settled into a more maybe a more modestly priced LNG environment with maybe a little less volatility than we've seen over the past couple of years. How should we think about the trading and optimization outlook for the Integrated Gas business in the medium term? And then maybe a second question on CapEx.

Speaker 11

So last year you reduced the targeted medium term outlook for capital spend. You've done a great job instilling confidence in terms of cost control and downward pressure there. What are you seeing in terms of cost inflation across your portfolio, particularly in LNG and Deepwater? And what risk or tension does that pose as you try to drive capital cost lower across the portfolio?

Speaker 1

Great. All right. How about do you want to take the first one? I can touch on the second one.

Operator

Certainly. In terms of sort of the trading and optimization outlook, in terms of going forward on LNG, I think it comes back again to the fact that we marry the 2 parts together, as you know, Ryan, so it is our underlying equity story, so the volumes that we've got. And of course then depending on the length that we have, how much we can actually play into the market. What we are seeing, of course, is that this sort of price point, you're seeing latent demand actually lift, particularly in Southeast Asia. So, of course, interesting of these sort of prices, you're seeing parties like Vietnam, Pakistan, even India coming in more into the market and therefore creating more demand and, of course, inching the price upwards as well.

Operator

It's quite small, but you can see that changeover coming from coal often as well. So the small changes in supply will actually have an outsized impact on price from time to time because it is a tight market that we see going forward. I go back to it was Freeport last year or just before that, but it was just an immense change, a tiny volume, frankly, but you saw how much it played out in the market. And that for us is where it's an interesting one because given the size of the assets we have, so not just the liquefaction assets and the production, we also of course have an amazing amount of vessels. And those vessels allow us to be able to move the product where it needs to be or in this case the LNG where it needs to be.

Operator

So when those that volatility or those changes with disruptions in the market happen, that's where we manage to take advantage of and actually make even more returns. So it's very difficult to predict what's going to happen in the next 2 years in terms of the LNG market, but we see more demand coming in.

Speaker 1

Thank you, Sinead. Then Ryan, on your inflationary question, what we are there's a couple of things. I think firstly, it's just becoming much more rigorous in the way that we allocate capital, and you see that, I think, coming through. We've had opportunities where we could have accepted lower returns because of the inflationary pressure where we decided to pause Gato do Mato in Brazil is a good example where we've said, no, we want to recycle it and we want to get a better price point. Otherwise, we're not going to simply invest for the sake of it.

Speaker 1

And so I think there's an element of rigour and capital allocation discipline that's important here. On the inflationary end of it, what we see at the moment is inflation quarter from portfolio basis portfolio level at around the 5% mark, plus or minus. There are certain elements or certain categories that are more in the 6% to 10% range. You see it, for example, in FPSOs. You see it with subsea hardware, but by and large on a portfolio basis, you're talking about 5%.

Speaker 1

And so, a big focus for us is what can we continue to do to be able to at least mitigate a portion of that, difficult to mitigate all of it, but a portion of it, while we continue to exercise enhanced discipline in the way we allocate that capital. Thank you for the questions, Ryan. Luc, let's go to the next question, please.

Speaker 3

Our next caller is Alejandro Vigil from Santander.

Speaker 8

Hello. Thank you for taking

Speaker 12

my questions. So one question about Namibia has been a very exciting quarter for some other players in the areas. What can you tell us about your exploration works there, an update on your activity? And the second question is about divestments. You have announced EUR 1,000,000,000 this quarter, which are your expectations for the rest of the years in terms of cash in from divestments?

Speaker 12

Thank you.

Speaker 1

Thank you, Alejandro. Do you want to start with the divestment one? I can touch on Ewuria.

Operator

Yes, very short on that one indeed. I think it's probably coming back to what we said at Capital Markets Day, where we play. We will play where we have differentiated capabilities. And you see us, you know, that exit that we talked about earlier, the question a great question earlier, Ryan from Paul in terms of China as well. Moving out of that B2B business, you've seen that on other things.

Operator

This quarter indeed, South Coast wind in the U. S. Where we just don't feel that we can play in the right way given the returns that we would see and we leave it to others who can do so in a different manner to us. So there's a number of those that you see coming through as well. And of course, we've already announced the Pakistan divestment.

Operator

We're looking to go towards completion. So you'll see a drumbeat coming through of where we step back or exit and divest from certain aspects of the portfolio where simply it doesn't hit our hurdle. And that comes back to what Wael was saying, the discipline that we are showing to ensure that we hit everything that we said to you that we were going to do, performance not promises, I've said it before, that is playing out across the full portfolio. And we're doing that because we have a wonderful position to be in. When you're sitting where we are, where the business is delivering very well, as you've seen from this quarter, where you're delivering over £7,000,000,000 on earnings, over £13,000,000,000 in terms of CFFO and more to come as we show the discipline on CapEx, show the discipline on OpEx, etcetera.

Operator

Our alternative is always going to be to have the ability to buy back shares. And you've seen us do that now 10 quarters in a row. So above SEK 3,000,000,000 So in terms of the divestments that are to come, there is definitely more to come. And of course, we look forward to updating you as we go through.

Speaker 1

Thanks, Sinead. Your first question on Namibia, Alejandro. What I would say is we continue our derisking program there. We continue to drill exploration and appraisal wells and study the results of it. And importantly, we continue to study the results from many of our neighbouring blocks to be able to better inform our own choices.

Speaker 1

We're not in a race here to be able to put the facility in place. What we have been very clear with the team on is this is a new basin. This is a complex reservoir. Significant volume is clear, but complex in terms of the porosities and the permeabilities. And so, it is important that we continue to ensure that if we are to invest significant capital here, we want to be able to have sufficiently derisked it and make sure that we can deliver the sort of returns that our shareholders expect of us.

Speaker 1

And that's the mandate that the team is working on, so working as quickly as they can, but with a clear objective to provide the right derisking for us. I think the recent discovery from Galp, I think, adds some excellent data points for the overall basin, and those will be taken into our broader considerations as we think about where we go next in our derisking program. Thank you for the question, Alejandro. I'll go back to you, Luc, please, for the next question.

Speaker 3

Our next caller is Christian Malek from JPMorgan.

Speaker 13

Hi. Thanks for taking my questions. And yes, just thank you very much, Chuck, for all the help over the years and also congrats to Oswald. So first question, if I may, is regarding what seems to be still quite a large degree of inconsistency in terms of cash flow. The cash flows from last quarter to this quarter, I mean 60% new.

Speaker 13

If I compare your cash flow variability to one of just let's say Exxon, it's far more. And so I guess the question I'm asking is what level or range of cash flow through the quarters are you comfortable with given that volatility can be quite unpredictable? And within that same question, where do you think a normalized level of cash flow should be? And because I'm also trying to understand when you say the Sprint, when does the Sprint finish? I mean, what are you happy with in the context of your KPIs that say we're done, we can now move to the marathon?

Speaker 13

Because all of the things you talk about are improvements that all business should be doing and it's wonderful to see it. I just want to understand what's the end of the runway on this first initial phase? And that sort of segues into my second question around your molecules. The LNG business is exceptional. I just wonder whether you're going to or thinking or planning to be as competitive and as scalable in the oil business, given your comments around energy transition and what seems to be potentially a bullish scenario, why aren't you thinking or talking about potential for consolidation given the window that we have to acquire oil barrels and particularly given the difficulty into building with a huge increase in CapEx necessary.

Speaker 13

So I just want to understand what's your thinking around buy versus build? Are you comfortable with the molecules that you have currently, particularly, let's say, the scenario doubles or we are in a strong cycle, Are you back solving from that today? Thank you.

Speaker 1

Yes, great. Thank you for those two questions, Christian, and for the recognition both for Cherka and Oswald. I'll take the second question first, and then I'm going to come to Sinead to have a moment to think about the first one. I think the on the oil business, a couple of things I'd say. Firstly, over the next 6 years, we have guided, of course, to stable liquid production on the back of what we already have in the portfolio.

Speaker 1

So that's our base case. The consolidation question, I think, is a good one. And we continue to look for opportunities to be able to, of course, bulk up as any good company should be doing. We have a couple of challenges here. One is, of course, our share price, we don't think, is reflective of an opportunity to be buying somebody else and creating accretive returns for our shareholders.

Speaker 1

That, in my mind, is a must do, right? If we start to sort of run on the back of value destructive deals, then we've lost the plot. So we want to continue to be doing the right thing by our shareholders in that context. The second point, of course, is that all the deals we're seeing out there at the moment pale in comparison to actually buying back our shares against a double digit free cash flow yield with a suite of portfolios, whether it's in deepwater, LNG, our trading business, our marketing business, which we know very well, which is much more derisked, which doesn't require as much of an integration effort and as much of a premium to be able to adjust, we can buy those at a discount today. And so we will continue to do that.

Speaker 1

And we will continue to do that until we actually see that the share price has responded in a way and that we have the currency to do anything else. And that's why we've said very clearly for this first sprint, it is all about getting the fundamentals right. And I'm sure Sinead will address the endpoint. But my 2¢ on it is the first sprint is nothing more than potential, and that's what we're going to go after and unlock. Sinead?

Operator

Indeed. And thank you, Christian. This is where you'll always get me excited about it because okay, so your comment, I can take it in 2 ways. So the way I will refer to it is, of course, more than CHF13 billion of CFFO despite approximately CHF3 billion, just under CHF3 billion of working capital out. So you're right, CHF16 billion of cash flow is an awful lot.

Operator

And indeed, every quarter, there is a lot of cash flow coming through from this business. And of course, that's what gives us the confidence to be able to do the buybacks. And that's exactly what we're doing despite the volatility. You've heard me talk about it before. We actually welcome volatility in the sense that we have a strong balance sheet.

Operator

We take the time to be able to delever from time to time. And we also, of course, manage to provide consistency. And that's the key point for investors in terms of the buyback. To remind you, since the Permian deal, including what we've announced now, we've done CHF 40,000,000,000 over CHF 40,000,000,000 worth of share buybacks. That's a huge proportion that has come through.

Operator

And this is 10 quarters of CHF3 billion or more. So in terms of inconsistency or consistency, I would say absolutely not. You see that drumbeat time and time again, we are predictable in terms of what we do. And how can we do that? We do it because of the underlying cash flows of this business.

Operator

You're right, it does change quarter to quarter and that's why I look through the quarters to be able to provide that stability throughout. That's why we've provided targets out there in the market in terms of the free cash flow and free cash flow per share. We have confidence in the levers of that. So that's exactly what we're doing. Stability in terms of the CapEx discipline, OpEx time, buybacks through debt being able to be delivered as well, providing that overall investment case as well.

Operator

So am I worried? And what should I think in terms of the free cash flow? What's key to me is to ensure that I have a balance sheet that allows me to invest through the cycle, allows me to be able to continue to buy back shares, which at this price are frankly just undervalued. And I get excited about the fact that the share price today is not even representing the underlying value of the business today, let alone what we are going to do in terms of Capital Markets Day delivery as well. So yes, all good on that.

Operator

And you said when does the Sprint finish? As you can see, I can get excited about this. The Sprint will finish at the end of 2025. That's what we've said so far. So thank you.

Speaker 1

Excellent. Thank you, Sinead. Christian, thank you again for the good questions. Can we go, Luc, to the

Speaker 7

next question, please?

Speaker 3

Our next caller is Lucas Hermann from BNP.

Speaker 14

Thanks very much, and look, thanks for the eat away, Shneur, well, just keep eating away and make sure it's very happy in its retirement as a Shell shareholder. Don't stop. Couple if I might. I just wanted to come back to Chemicals and to try and it's I guess it's back to Paul's question around utilization. Great, you've moved away from 60%.

Speaker 14

You're guiding towards 72% to 80%. And I'm presuming you're saying within that the moniker is running, if anything, it's down above nameplate. So it's really trying to understand why the numbers remain as modest as they are. Is that a consequence of a very difficult margin environment and you're actively deciding you're not going to run plant? Do you think that on the €25,000,000,000 of capital that's invested in that business, how much of that capital do you think can earn a cost of capital return?

Speaker 14

How much of it not? And secondly, and sorry to stay on some of the businesses where I don't quite understand what they're delivering. Sectors and decarbonization, if I look back, that business used to deliver €600,000,000 €700,000,000 of net income per annum. It's done €20,000,000 in the Q1. Has it kind of become an area of experimentation and development and spend for the future and for the Powering Progress strategy?

Speaker 14

Or what kind of level of net income do you think we should realistically anticipate from that business in the near to medium term rather than long? That's it. Thanks very much.

Speaker 1

Lucas, thank you for that. And we will indeed keep eating away. Let me take the first one and then ask Sinead to address the second one. On Chemicals, you'll recall, Lucas, of course, in June, we talked about Chemicals and how we were positioning Chemicals. We had some assets in the portfolio that were, if anything, actually destroying value.

Speaker 1

There are negative return on capital employed. Others that were sort of at the coming out from a nonproductive phase of capital deployment into productive phase, such as Shell Polymers Monaca and others that were somewhere in between, like our European assets, and we had to sort of do some work on them. I think it's fair to say that on all three, we're making good progress at the moment, right? So of the $25 plus 1,000,000,000 of capital employed, we have already talked about the planned divestment of Bukom Jurong, which is the Singapore asset base. We have announced a couple of things on a few of the units in Europe.

Speaker 1

And then the other 50% of that capital employed sits in Shell Polymers Monaca. There's a lot that we are doing in that space. We have talked about selling or high grading the portfolio by selling the assets that are underperforming. We have talked about other specific units that are underperforming. We will either shut them down or convert them.

Speaker 1

We have recognized that our cost structure in that business needs to be addressed, and we've made some moves, including, for example, a few months ago where we trimmed down significantly the commercial staff base. We have shifted the interaction between our chemicals and products and our trading organization where there are some elements which we had duplication. We have now removed that duplication and consolidated. So we're doing all the things we can do to be able to bring this business to be the best it can be within the constraints that we continue to have. As we continue to step up on Shell Polymers Monaca, what you will see is continued improvement there, of course.

Speaker 1

As we look to go into the next grade of products and the next grade of products, we will be locking windows with many of our customers. That typically happens in the late Q3 or early Q4. So all of that is yet to come, but right now, we're maximizing value within the constraints we have. And I would say, to your point, margins continue to be very challenged, right? The indicative chemical margin for this quarter was 150, better than what it was in Q4, but that is still woeful compared to the historic trends.

Speaker 1

And so we will do all we can within what we can control and position ourselves to have choices thereafter.

Operator

Yes. And on sectors and decarbonization, I'll keep it reasonably short, Lucas, because I think there's a number of parts in here. You've got parts like Holland Hydrogen 1, you've got the Hefe plant in the Netherlands, both of which you're right, they're not generating any debt income at the moment, but they will in the future. And of course, have to invest for that. And you know the investment case around those.

Operator

So no need to talk about that. We also, of course, have had a difference between what would have been the voluntary market before in terms of the drop in, of course, of different fuels. You're right, that has come down in the recent times, but that obviously goes back and forth along the way. The other part of it, of course, is that Raizen sits there as well. And Raizen, of course, in what we've seen in Brazil over the last couple of quarters is we've seen actually a lot of ethanol into the market.

Operator

Now I can either take that as being very worrying or actually take it as being we know there will be a change because what Brazil will do as it typically does, you have the flexibility of course for cars to run their dual fuel. They can flip between ethanol and normal fuel. They will change the requirements there, which is what they've done year on year. And that will require basically more ethanol input into it, which will increase the market as well. So you see that, but you're right, it's at a low price now.

Operator

And beyond that, of course, there's things like aviation and marine in there. And of course, what you typically see is that you'll see the ramp up, particularly for Aviation coming towards the traveling season. It's pretty low at the moment. But to be fair, it has not come back since what we saw pre COVID as well. Beyond that, which I think is where you're going to as well, investments going forward, clearly they'll be at the hurdle rate and that's where we're very thoughtful.

Operator

What we've seen is actually the EVP for that business actually looking at where she can step back from certain things and say do I have a differentiating capability. So we don't serve the mining sector for decarbonization in there anymore because that's not where we add a lot of value. We don't make good margins. So I'll keep it there.

Speaker 1

Good. Thank you, Sinead. Luc, I think we're close to time. Any more questions?

Speaker 3

Our final caller today is Christopher Kuplent from Bank of America.

Speaker 15

Thank you. I'll try and keep it short. So Jack, we'll speak later. A quick one, maybe Sinead, you can, of course, point to seasonality in CapEx. It's been a light quarter, but maybe you can talk to that seasonality versus real underlying efforts of spending less.

Speaker 15

I've noticed that spending levels have halved basically in mobility, for example. Maybe you can touch on a few points there. And maybe you referred to the AGM that's upcoming in your opening remarks. So I'll leave it to you while maybe to comment on how Shell is this time around, at least in the AGM season made an example amongst the big oils and the shareholder resolution that you're up against. Can you maybe put that into context considering the conversation whether live or not about where your primary listing should be?

Speaker 15

Thank you.

Speaker 1

Excellent. Thank you very much, Christopher. Let me hand over to you, Sinead, for the first one.

Operator

Yes. I'll keep it short to allow enough time for the second one. You're right, CapEx is low, absolutely, this Q1. It tends to be very lumpy, though, as well. I think it was Lydia in Q3 last year, actually, who called us on that and asked for a bit more.

Operator

What we're seeing, of course, is just that capital discipline is kicking in. You're absolutely right in that. You see that in mobility, etcetera, but it is about timing as well. So a lot of our payments tend to be a little bit lumpy. So you see it at different times.

Operator

So Q4, as you will have seen, was quite an uptick there as well. But that discipline lens is going through the whole organization. You'll see lumpiness, things like whale, etcetera, different payments that still have to come through in the course of the year. So I'm not reducing the guidance at the moment, keeping it in terms of 22% to 25%.

Speaker 1

Thank you, Sinead. And to your broader question, Christopher, thank you for the opportunity maybe to comment on the AGM on May 21. So a few things. I think one is we go into this AGM with, I think, real momentum in the share price. 1 of the or a few of the comments that I received at the last AGM were many of the shareholders with a few shares, retail shareholders saying, Hey, we've been holding your shares for a long, long time.

Speaker 1

We want to be able to see some uptick. And hopefully, we can stand proud and say we have been able to continue to drive some of the valuation of the company while recognizing there is a lot more to go. And so we will humbly submit that there's a lot more running room. We will also, of course, be putting forward our energy transition strategy for a vote, which hopefully everyone will have seen the thoughtfulness that we put behind it, the broader understanding of the energy system, What I would say is a company that is truly leaning forward in the energy transition, but in a thoughtful and profitable way because, ultimately, that transition is only going to materialize with scalable and profitable business models, which is what we are trying to unlock, and that will require us. It will require governments.

Speaker 1

It will require customers to step to the plate. There is, of course, also the follow this resolution. I think to your implicit point around, to make an example, I think it is a focus on Shell, which we welcome because at the end of the day, we have the opportunity to be able to, I think, tell a very compelling story, a story of how this company has invested $10,000,000,000 to $15,000,000,000 between 2023 2025 and invested $5,600,000,000 in the low carbon space last year, a company that is investing in the largest green hydrogen facility in Europe and looking to create real value out of that when others have made promises but have not followed through. And so it'd be a real opportunity to tell our story. But importantly as well, a reminder that the resolution, while appearing noble in its intent, fundamentally hits a few key points for us.

Speaker 1

One is it is bad governance. It looks at one specific metric without looking at the entire energy system, and this is where we would ask our shareholders to spend time just reading through the energy transition strategy and looking at how we are thinking about the broader positioning of the company. We also think that that resolution is going to be very bad for shareholders. We will be giving up businesses to others just for the sake of it. It will be bad for our customers who are depending on us to actually support them in this transformation and in this transition.

Speaker 1

And it will not actually help the climate because all it will result in is us getting at the businesses that others would serve. And so for all those reasons, you've seen a unanimous support or unanimous advice from both the management team and the Board for the 8th year in a row to say, Do not support that resolution and support management's resolution. And I think I hope that through the efforts and through the debate that is becoming much more qualified these days and a deeper understanding of how we need to keep the balance through the energy system, our shareholders will vote in the right way in support of management's recommendations, and I look forward to that. Very little in terms of how this all impacts listing. I think the ESG agenda, when done in the right way, should be done all over the world.

Speaker 1

So that's not a Europe or U. K. Specific thing. But hopefully, it's more the investors leaning in and being able to truly get much more detailed in the way we're thinking about our energy transition and not fall prey to what is too simplistic and, to some extent, a destructive resolution that has been tabled. Let me leave it there.

Speaker 1

Christopher, thank you very Let me close off by saying thank you to all of you for the questions, for joining the call. In conclusion, we have delivered yet another strong quarter. We announced another $3,500,000,000 of share buybacks, which makes this, as Suneet already said, 10 quarters in a row with buybacks of at least $3,000,000,000 I think we are building now a track record of consistency and are progressing well in our 1st sprint to deliver more value with less emissions. And we continue to aim to be the investment case through the energy transition. We wish all of you very well and have a pleasant end of the week.

Speaker 1

Thank you all.

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