Q2 2021 Royal Dutch Shell PLC Earnings Call (Q&A)
Changing that footprint actually is a significant contribution eshkol that's not a reason why we do it but it just happens to help.
Thank you very much of a rush, so celiac and I have done and your question. Please thank you.
Jon Rigby from UBS. Please go ahead.
Thank you Hy Bon and Hi, Jessica.
And congratulations on the change to distribution I think that's a very important signal around the performance we've seen over the last few quarters.
I think I had just 2 questions. The first was to come back to question and I think asked from the first quarter, which was about the integrated gas business because if.
If there was 1.
Place.
So I have might have and it seems to be that the integrated gas.
Which was a standout startup of former for such a long time, it's really sort of slowed right down and the last I'd say 4 quarters or so and I think I asked for the first quarter, whether it was something structural and I think you said no but.
Maybe if not structural is there sort of a.
Book to medium term.
Headwinds on that business that is stopping you participating and what look since we like very good LNG market conditions, and I know you've called out Pru and Trinidad so maybe some.
Sort of medium term discussion of guidance around the performance of that business will be will be helpful.
And because obviously things like optimization and trading is fairly low visibility.
For us and the second day is and maybe this is from more optimistic point of view is that I noticed.
Your oil products business generated very good.
Return, but.
Some of the other activity, which I think includes aviation and obviously lubricants are still probably below.
Where we would expect them to be in normal conditions. So.
And obviously, some upside potential and that so I just wonder whether you can make some comments about where you think.
Typically the AVX.
Please lube's businesses.
After the second quarter.
Thanks, Joanne Thanks for acknowledging the strong results and Jessica would you mind talking about the Igl book about oil products.
And.
And so John Thanks for the question.
With integrated gas, we have a great.
Business and a soft quarter and we had as you noted relatively soft quarter.
When considering the price environment that we're in but let me let me tease out a few things.
First of all and 19 and in 2019 and 2020, we have some pretty extraordinary.
External market events that the integrated gas.
Businesses was able to take advantage of.
And those quarters happened I did point out these were pretty extraordinary quarters, we shouldnt consider that kind of normal course of business. So I think theres been some unusually good quarters, and and 2019 and 2020 that can.
Perhaps ground people to.
And average that was a bit higher than perhaps it.
It should be.
Looking to this year, specifically and and the second quarter. We have had some softness if you look at the production levels and importantly, LNG liquefaction levels. That's been a combination of factors. It has been some gas supply issues and a couple of of our assets and there's been some operational issues as well and it's.
That supply issue, that's really been the main feature for the second quarter.
Those arent long term structural issues, we will resolve gas supply, we will resolve the operational issues and some instances and it'll be weeks in some instances that may be months Oswald. So we will see some of this going into the second quarter in terms of what's impacting the business.
And all of the business, we continue to believe and we think we have a privileged supply portfolio overall, we've got privilege relationships in terms of the demand relationships that we have and of course, there's new opportunities that are emerging and this business as well. So we've seen some of the risks are.
Realize that we have to keep in mind, the opportunities as well and things like our carbon.
And neutral LNG that we're delivering and places like China.
China, the opening up of new markets from a re gas perspective or from a shipping perspective. So theres also important new milestones in terms of growing the business that will underpin we think the long term strength and overall the fundamentals for the integrated gas business. We continue to believe our are quite.
Good.
Got it thanks, very much Jessica I think on the on the B side has been a very strong quarter.
I think it's the best quarter since Q3, 2020, which was actually an outstanding quarter and I think and retail it is the second best quarter.
Quarter to altogether and the day marketing business is doing well and Theres environment now volumetric review and not entirely day, yes, John So first of all on retail.
And globally back to about 90% of pre pandemic levels, so a little bit of variation across the different regions.
Got it.
But it's it's it's approximate.
And again to where we were if you look at our non fuel retailing by the way that is significantly enhanced I think it's more of a 125 per cent in terms of contribution and indeed Youre also arrived aviation is lagging behind and I think aviation globally, the appropriate something like 45 per cent of what day.
Proximate volumetric level square and pre pandemic periods, and that's obviously not surprising because even though aviation's picking up intercontinental flights are still pretty much lagging lubricants went back to 100% and.
And I and I do believe our lubricants business is.
And is performing well also in terms of.
Margin, so altogether I would say quite happy with how to marketing business has responded very good margin management very good discovery of new scenes of value and I think also more potential to come because ultimately even though.
And we may still see a little bit of lagging the recovery.
And in aviation and Bell commercial at this point and time.
So thanks, very much John and Cecilia I can have the next question. Please thanks Pam.
Mechanical live and yet from Goldman Sachs. Please go ahead.
Ben and Jessica Thank you very much for for your time and congratulations on the strong results I had 2 questions.
If I may the first 1 goes back to the shutdown and you've experienced in your LNG east mess. It doesn't seem to be unique there seems to be pretty broad the trend across the industry of and plan the shop, which is not fully unexpected event and that we've just been through a year and a half full day.
Reduced maintenance I was just wondering how long you think it will take for the industry as a whole of that for shell specifically to digest this backlog of maintenance and effectively go back to normal.
And my my second question is about the decarbonization you've made some very.
We'll need to make to decarbonization, you've signaled the intention to even upgrades those commitments for lowering the Dutch ruling.
And all of that is very consistent with what we are seeing for instance, and Europe in terms of policy, but if we look on a global basis and looking for instance at.
Add to the inability of the G 20 meeting last week to reach any form of global agreement and understanding about it. The risk is that you could make a commitment which makes perfect sense for Europe, but which ultimately it doesn't reflect the reality of shifting demand on a global basis, how do you.
Strong strategic and you're about to D C b.
Sure.
Contrast between Europe duration, Europeans aspiration, but what that could be is there a different global outcome. Thank you.
Yeah, Great question Makena, Let me take the second 1 first and then Jessica will take the LNG, 1 and again so.
I think.
And your observation is.
Correct.
B B R&D.
And my mind also a leader when it comes to decarbonization and our industry and indeed B B have said very clearly that we will be well upgrade accelerates step up et cetera that part of it of course was exactly what we did in.
And you're seeing as day 21, our strategy announcements and February which by the way came after the hearing from the court ruling what I believe are powering progress strategy is very much a statement of stepping up and are accelerating and.
And indeed following the court ruling me, Yeah, I mean, I would have to examine what else if any.
And we can do 1 thing it is pretty clear b.
He didn't say very much scope, 1 and 2 emissions and February and then the document and our shareholders voted on at the AGM other than to say that will go to zero by 2050.
And a court ruling basically introduces a waypoint and <unk>.
Yes.
B 45 by 2030, and I've been very clear that as a challenge people step up to B are studying and examining what it would take but if we could do it et cetera et cetera, you would've seen that b I'm, making progress already on the refining side and if we believe that that is very clear, how and if and when we can do it we will again.
Again go back to our shareholders and say this is what's stepping up to that challenge means.
Now to scope, 345%, which of course is a significant best efforts.
And the obligation that's a different matter, we cannot go faster and society that is just the reality, maybe and convenient for society, but it's also.
And so true so here beside me go as fast as we can our strategy is all about helping our customers decarbonize and yeah, but a 45 percentage doable remains a big question. Indeed, I would be delighted by the way if you manage to do it but if I now look at to your point, what you are saying.
With that fit for 55 package, which we completely endorsed by the way in the sectors that we are serving and that package is roughly is half of that 45%. So you can I think legitimately ask yourself. The question how realistic is it for us to aim for a 45 per cent reduction if the most progressive.
And most.
Aggressive.
Jurisdiction and the world can only muster half of Dutch.
That's also the reason by the way, we appeal, but it doesn't mean that we wont be pushing when it comes to decarbonization of the economy sectors and the world.
Jessica.
Right.
And they came out in terms of what are some of the dynamics at play and the LNG industry more broadly.
While there has been maintenance issues happening and many assets within the shell portfolio and across kind of the LNG industry I'm not aware of it being <unk> issue around backlog maintenance.
Our and certainly within the shell family of assets, it's been pretty disparate issues at play and so theres not a theme that there was.
Maintenance activities that hadn't been gotten to and therefore these are the implications of it not at all we've been very careful through the pandemic to ensure that asset integrity and maintenance get.
Maintenance and what gets the right level of attention and and there is pretty distinct issues at play with with our assets. So I.
I don't think it's a backlog issue so much as I said, there's a maintenance piece to it just a gas supply piece to it like gas supplies is coming from third parties, it's not necessarily the shell portfolio at play that that's causing.
Some of these outcomes and as I indicated before I think some of these issues will resolve and weeks some of them will take some months I will expect some of this impact going into the second half of the year, but once again I don't see these as structural issues certainly for our portfolio and I would just emphasize that the fundamentals of the LNG business. We continue to believe our very strong if.
If you look at the volumes, we've achieved or the industry has realized and the first half of 2020 at some 10% higher than it was at pre pandemic levels. So I think that's a good solid indication of the demand for for LNG and as I mentioned I think there is many more opportunities for us whether it be from a shipping perspective.
Changing out coal for gas and the power sector or Decarbonising LNG through MBS and other means I think there's still a lot of opportunity and it will create more value creation opportunities force going forward. Thank.
Thank you Jessica.
Cecilia who is next.
Christopher Copeland from Bank of America. Please go ahead.
Yes. Thank you. Thank you for your time and taking my questions.
And this will sound familiar to you but.
You've obviously said you are trying to accelerate youll decarbonization efforts and I wondered how.
How much of tool as possible without.
Disposals to your point on refining a 50% reduction I wonder how much of that 50% reduction from 18 to 21 I'm not sure whether you can tell us comes from the disposals you've made.
And all the good things that we know about your plan for hydrogen and carbon capture even thing Jessica that you just mentioned in terms of.
Net zero LNG et cetera, they to me will take quite a lot longer than you have to appeal. This court decision. So I wonder how you.
View.
Immediate reality, what that means accelerating decarbonization and also if you could perhaps.
Link that into your into your budget discussion and then and then lastly, as a second question just wanted to come back to you and ask about the dividend reset again, you are calling into resets and is this very much a 1 off and perhaps you can let us know a little bit more in detail how.
Came up with 24 cents, who you benchmark that against and and why you feel happy with 24, not 30 not 'twenty. Thank you very much.
Yes, what's it and number thank you very much I'll take the first 1 Jessica will talk about a dividend this time.
I think just let's be very clear on the.
You can be acceleration and and <unk> and the.
Space. So let me talk about scope, 1 and 2 emissions.
That's about 70 million tons, plus 10 million tons out of a total of a 1.
1.7 gigawatt homes.
And that you can address if you wanted to true.
Through disposals, and it will be a combination of some closures disposals of refineries.
Right sizing efficiency improvement and Ccs electrification all of that that will drive us towards shall we say -45% and ultimately to zero, but it is actually a very small amount of our emissions.
And as it will require a modest amount of capital that we were going to spend on high grade and these facilities anyway. If you talk about accelerating the scope 3 emissions reductions.
Disposals don't work yeah.
The number of assets the only thing you can dispose of as customers.
Which is obviously not a meaningful strategy and Thats again.
And while we are appealing so yes disposal will have their role and scope 1 and 2 when it comes to addressing scope 3 emissions. It is actually changing our product portfolio and therefore changing of business models, it's not always as well understood and I would like it to b and once more of a clarification here.
Jessica.
Hi.
Christian so in terms of how we landed on 24 cents and why that's the right number for shell first of all we looked at the actual performance of the company over the last 12 to 18 months, which was a great example of our ability and capacity to deal and it's a pretty stressful set of set of external and to some extent internal circumstances. So.
Without the performance of the company the assets the people the cash generation and financial outcomes.
All very strong and robust Austin, and very stressed or set of circumstances, we consider the outlook.
How do we feel about the macro what does it look like in terms of the fundamentals of the business for the next 612.24 36 plus months.
And again, we're feeling very good about the pace and level of recovery that we're seeing and and the business. We then think about what's resilience through a variety of different outcomes. We've all seen how volatile. It has always been to some extent, but I think particularly so over the last couple of years, we've stress tested our financial framework at very low levels.
Levels of prices and margins.
We do consider the upsides of but we will probably spend a bit more time on the downside, particularly from a resilience perspective, when considering what is the right dividend level for for the company and of course, we consider the investment case and how do we ensure we're providing compelling returns for for our shareholders you bring all of that together we landed.
And how are the 24 cents number which is southern and a half a billion.
$1 billion and total dividend quantum.
And of course, we retain our overall capital allocation framework, which has the progressive dividend, which gives us another opportunity for us to increase dividends per share by 4% a year.
Year on year.
And of course, we keep the opportunity and flexibility to do share buybacks and you know at least at this share price level.
Very compelling case for us to continue to reduce our share count and so that remains a priority for us and therefore on balance we think southern and a house is resilient and importantly compelling.
<unk> set a more meaningful number for our shareholders. That's important for us and the share buybacks will give us further flexibility to increase shareholder distributions going forward.
Okay. Thanks, Jessica.
Cecilia who is 90 days.
Okay.
Martin Rats from Morgan Stanley. Please go ahead.
Hi, Hello.
And also from my side, congratulations with the richest set of announcements I think it's extremely welcome and I.
2 questions first of all I know these days and we talk about many other things.
But oil is still such an important part of the business and it's notable that.
And the production specifically of oil so not on a.
Our basis and specifically if oil is still down even relative to Q2 last year and this is actually something that is also quite visible and many of your peers. So it seems to be more of an industry trend and trial than anything else and.
And with Capex levels sort of kind of sort of being where they are and.
You could start to wonder.
B.
And where they're bringing back all this non OPEC supply and may add.
Actually no b. So now I don't want to sort of lead you in a certain direction, but when you put these 2 things together and the level of production.
This is the level of Capex, what you're seeing and your own business, what you're perhaps seeing with your peers. I was wondering if you could give us your thoughts.
And how you think.
The recovery of oil production.
Likely take place specifically.
And specifically.
And specifically outside of OPEC of course.
And the second 1 that I wanted to ask.
Is it.
It's about the IPO of ryzen and <unk>.
And which was sort of announced.
And that's all a while ago and I think that process is ongoing.
And I was wondering if you could give us your thoughts on surviving this.
So this is why this transaction is taking place is it mostly shell driven or is it mostly.
It goes on driven how do U S.
Shell actually selling shares and this could just be a template for.
And as to the other types of assets that fall into sort of new energy type sort of space could you just give us your thoughts.
On that particular transaction.
Thanks, Greg and good.
Questions.
Although 1 Jessica dues duster ryzen.
Yes, I think first of all on oil it is indeed still there.
And the world still needed for a long time to come.
And even if you believe the and then you IAA reports and we still need to invest very significantly over the next decades and oil production. We've been very clear we want to have a high quality oil and gas portfolio that will indeed see sort of 1% and 2% decline on the oil side.
Over the next decade, but we wanted to be a high enough quality portfolio that will last well into the thirty's and generates a lot of cash to fund the company.
So that's point number 1.
But indeed, it will be a miles b shrinking portfolio and you're also right in the sense that of course over the last few years.
Many of our non OPEC is not exactly investing that base. So you could indeed ask yourself. The question that if indeed oil demand stays strong or maybe even gross for some time.
How is that going to work out from balances and could even argue by the way, but OPEC has the capacity to.
To bring back all the volumes that are going to be needed and not going to speculate.
And what will happen to the oil price I think that's too hazardous, but I wouldn't be surprised if for a few quarters to come we are going to see relative tightness in oil markets and.
Rich.
And I.
I would imagine this is going.
To help us from the strategy, even better Jessica.
Jessica.
And it's so in terms of ryzen, our ryzen of courses and important part of our portfolio and our downstream.
Downstream, if you will strategy in terms of our access and participation and Biofuels that makes us 1 of the most.
Significant players.
And in the sector because of this partnership with caisson that you you referenced it's gone incredibly well for us and we're very pleased with the performance of that business and it's been growing quite steadily over the last couple of years and I in terms of the IPO. It was another way of accessing capital.
For us I would say, it's a pretty distinct set of circumstances that makes that the right choice for this business I wouldn't necessarily see it as a template.
There'll be some participation in terms of our equity and it'll be a minor change in terms of our exposure, but again, it's for us to participate in the Brazilian and equity market with a very solid company.
Aligned with our partners as a way of accessing capital to support further growth for horizon, which were.
Encourage to do given the performance of the company.
Thank you very much thanks, very much alright. Thank you Cecilia who is next.
Lucas Herrmann from Exxon.
And all that.
And Jessica Thanks for the opportunity and it's not to say some of the the value and your business being taken up today.
Couple of questions, if I might and.
And just to follow and actually from the last 1 if I could start with Boston and you're taking any capital out on my presumption is nox.
But just to confirm.
The questions themselves just because I wonder if you could talk at all about asset markets, but the person. So I mean, you clearly have a low.
To the cheese that Shaw.
<unk> 2 diverse disease slimmed down you know to the cool.
And.
More generally just on the pipe.
<unk> lineup developments and.
Usual question can you talk a little bit about you know chemicals, what's happening and Pennsylvania, how visa is developing just you know the new project pipeline and Hum.
With time and call it at the present time, thank you very much.
Thank you Lucas I, let me Yeah, I think this is probably going to.
So let me say, a few things and Jessica will supplement and me.
And if I'm correct me if need be so no we're not planning to take capital out of our price and this is basically funding.
And venture that has tremendous opportunities to continue to invest and second generation.
Bayou projects.
But also to continue to grow you will have seen b have true ryzen and <unk> done a very significant acquisition, adding 50% capacity to that venture.
And B C also base and means to continue to upgrade and business. So this is basically a means to raise capital for it and it's.
B dub milestone that we are able to do that at this point and time.
Oh half, Jessica and talk about asset values and in a moment, but in terms of the project of course.
You will appreciate that there has been a little bit of a slippage and a setback and the independent make period, but for the projects that you have mentioned.
Great.
Really very very pleased with how we have been able to deal that depend on mix, So vito, which is being constructed and the yards and Singapore actually is doing very well and we are picking up pace very quickly.
Maybe a few difficult months and and the yards and on Pennsylvania, and you can imagine.
Having 8000 people on site and in a relatively short period of time, reducing debt to a few dozen is quite a significant slowdown but also now we have been able to bring back again almost to near full complements the construction crews and we actually have to do and are.
A very careful way as you can imagine simply because that would not be capacity enough and the county to deal with a mass outbreak, which we havent had by the way. So again I think a tremendous resilience from our project teams to to run. These projects same is true for the.
The onshore construction and kitimat for LNG.
And.
So altogether.
By the fact that we haven't even seen and impact from the pandemic I'm incredibly pleased with the Brazilians that our teams have shown the pipeline of projects I think it's probably best if I refer you to the slide pack that you have purchased it's actually quite a few good details and and if.
And she kind of specific questions on that perhaps because it's best to talk to the IR team Jessica what did I Miss.
That was good and I believe with Pennsylvania, and we had our first electrons.
Starting up the power plant there. So I think things are moving forward really well at the site, particularly given the.
The COVID-19 backdrop.
And just just described in terms of the M&A market has proven to be very healthy the share healthier than we expected. There was a number of assets that we had and the funnel in terms of potential divestments that we were expecting we wouldn't really get traction on until 'twenty 2 'twenty 3 and those have been advanced.
And that's you're seeing some of that come through and and.
And so we've had a few more that we're working and that's how we can land and the second half of the year and I'd say, that's true and our downstream assets as long as our upstream assets. So I would say.
And are responding to I think the the uptick and the economy and are feeling pretty bullish around the sector. When it comes.
2 and M&A perspective, I'm very pleased with our are delivering there yeah.
Very good thank you and just on and you talked about veto, but of course very important also to bear in mind that we just sanctioned and other project project whale and the Gulf of Mexico, which there'll be and 80% replica and both veto. So again you will see that we are still very much taking.
Hopefully each of these opportunities as well.
Thanks, Lucas Cecilia who is next.
Paul Cheng from Scotiabank. Please go ahead.
Alright. Thank you good afternoon and good morning.
2 question piece and maybe at the bank and you're talking about.
Share of yet.
And you guys had mentioned that the onshore operations given the change and Oh that the continued deterioration on the situation there.
And that you are looking for potential day for office sales to see if there's any pockets 1 day and also just curious that I mean, you still have the LNG.
Advanced operations in Nigeria, as part of the call.
But if the political and mom and yes, we need in your opinion that deteriorating why you think that the LNG operations or the gas side is not going to be impacted and if that's the case.
Would that still be consider as part of the call.
For you so.
And so that's the first question.
The same question, yes were they to Iran.
And if that's.
That's a new care still between U S and Iran.
I think in the past that shell has been investing in that country, but given your new business model.
Even.
Even with our new kit, there, where you've run stupid and then Chuck you page for you to go back a year or that I mean, how the new model, we're looking at opportunities like that.
Thank you.
Thank you very much Paul and good morning to you I think I would definitely have to take the Iran question.
But it but let me also say a few things about Nigeria.
Which I'm very very close to.
So on Iran.
Even last time around but I wasn't opening and there were opportunities for us to go in and we did indeed participate and discussions, but we were very cautious for August for political reasons.
I think this time around not only would it not be any different but of course.
We also have different investment strategies and so.
Thank the chances of us.
Really actively pursuing oil development, and say and Iran are probably lower than ever before but that may not get too much ahead of myself because there is actually of course at this stage of the game nothing whatsoever going on.
And Nigeria, and we've been very clear and Nigeria is completely onshore oil is completely outside of our risk appetite.
B had been.
And quite heroically trying to deal, but and incredibly difficult security situation into Delta and.
And we have concluded that there was no way b are able to.
2.
To turn that around or to insulate ourselves from.
And the banditry, Dennis basically happening there and so indeed, the discussions and are progressing.
And the federal government of Nigeria, we have been talking to is true quite extensively already with the minister of state for petroleum.
Protium, <unk> and MPC and with other stakeholders and our plans are very firmly that we need to get out of onshore oil or as a matter of fact onshore.
And that's that's all progress it's not necessarily just asset sales. We're looking at all sorts of other ways as well that are not only certain soon.
Soon but also able to be executed in a way that leaves a positive legacy behind.
Now on LNG and it also and the Delta.
And it's on Bonnie Islands and.
Actually the whole security situation that has a different ballgame altogether.
Nigeria LNG is very well run Bonny Island is a very.
Stable basis, if you can call of that and and the Delta and of course, it's a whole lot more difficult to steal LNG compared to standard oil. So it. So we actually haven't had any significant issues when it comes to but to Nigeria LNG and it is of course, a very good contributor to our financial performance.
Banks Bowl Cecilia and I have the next question. Please.
Yeah.
And Marina and Luna from Society Generale. Please go ahead.
Thank you very much and good afternoon, and and congratulations for a day.
The decision on Investor day.
My questions are on the upstream and.
In Q2 East.
And we clearly did we leave out the provision reversal and it seems that your upstream you need perfect margins rose sequentially value there.
Essentially about 10, 4%.
Or a 13%.
And higher oil price and I Wonder if you can talk around the day evolution, you're seeing and your unit costs are in.
And that business and.
The other question relates to cost inflation, obviously, we are seeing a lot of from price increases and metals commodities and so on and I wonder how.
And as you go you'll procurement side. These east protecting you from that potential cost inflation.
Do you have for example, long term contracts that insulate you from Baird. Thank you.
Got it thanks, Irene let me make it beginning on the second question and I and Jessica will no doubt and be able to add.
And then also take the first question so indeed.
Cost deflation is something that we watch very carefully we have been very good and taking cost out.
But of course, we need to be very mindful that it also can come back.
So far and most categories B I.
And we're actually seeing very modest cost inflation and.
And the areas.
<unk> inflation as the most profound is maybe and steel and logistics, but and steel of course from a significant drop that we've seen before and low.
Just because you can imagine of course is getting a little bit more challenging, but so much recovery taking place, but you're also arrived is that of course with many of our procurement activities being.
And being on the basis of long term advantage contracts strategic contracts with suppliers, we are actually able to lock in.
Advantage is quite significantly and therefore and the main they're actually seeing quite a modest effect of inflation on expenses Jessica.
And I think I covered that well and terms.
Right.
What's happening on that and not a cost perspective, and a supply chain.
In terms of upstream and the margin improvement that you're seeing that's been.
A core part of our strategy from that business and a number of things are driving that and the first piece is our portfolio. We have actively managed.
<unk> portfolio should be focused on value over volume and he said.
We talked about that a lot and the last couple of years and I think youre seeing the benefits of that strategy and that portfolio shifts and action and so we have a lot more access to high margin barrels and importantly barrels that are.
And re available for the upside as the macro improves so the first piece is what have we done from smoking.
Folio perspective that gives us access to high margin barrels that have upside and the second piece is on the cost.
Side of the equation, while he was running that business very focused in terms of driving efficiencies and.
And this ambition seems to grow each year, that's coming through from a cost perspective, and that's also contributing to the margin that you're seeing and of course operational excellence, which is another piece of the upstream story and pushing availability and getting the most from our assets I think all 3 of those leavers are being pulled at the moment and that's what's driving the improved margin that you're seeing.
Year on year.
Thanks, very much Jessica thanks, very much Irene.
So Sylvia who is next.
Roger read from Wells Fargo. Please go ahead.
Yeah.
Hello, and good afternoon, and good morning on our side of the pond.
Just 2 questions I'd want to go to fairly quickly here..1 is I know you've reached the 65 billion net debt and that triggered the share repurchase congratulations and all of that what should we think about what you want to do with the balance sheet going forward that'd be my first question and then the second 1 it's been kind of.
I asked around a little bit, but basically it's on the production front I mean, if we look at what is going on and I know there have been you know pandemic curtailments and all that sort of thing, but we're looking at a fairly consistent string and the upstream.
And really the company overall.
Significant declines in oil and gas production and at a much higher rate than what is your long term forecast. So I'm just curious as we look over the next couple of years some of that curtailment comes back, but what else is going on.
Behind the scenes, it's not just asset sales.
Of sick or curtailment relative to the Capex that was asked I think pretty much the beginning of the call.
Yeah, Thanks, very much Roger and good morning to you.
Jessica why don't you take the first question on the balance sheet. What we're doing next I'll talk quite a bit more about production also in the.
The sector Okay.
Good morning, Roger.
Indeed, very pleased that we reached the $65 billion milestone.
By the second quarter.
And you know, reflecting very strong macro not very strong very strong performance, and a improving macro and and and that coming through as we've spoken.
And to earlier in terms of going forward, we're very much committed to a strong balance sheet.
And what we'll look to manage the company to is within double AA equivalent credit metrics on what that means in practice is and this macro environment I would expect us to continue to reduce net debt by some 1 to 2 billion.
And even trajectory in terms of improving the net debt and and the balance sheet further in the coming years.
But of course net debt is a function of overall cash flow generation. So are these things need to go go hand in hand, but the overriding message is we will continue to strengthen the balance sheet and we will look to run the company.
And within that double a credit metrics.
Yes, I don't know production piece.
First of all talk about our own company.
We've been very clear B.
We will not invest any more at the level that just sustain this business on a headline basis.
No.
And when you go back to our disclosures and too.
2019, and he said he would need $11 billion to keep upstream Meredith and today, we're spending $8 billion. So clearly that means that we are going to high grade our spend and going to accept a certain degree of decline, we said, 1% to 2% decline per year and oil we grow the percentage of cash a little bit into the mix.
But it is inexorable decline and oil.
The spend that we have the $8 billion is very much focused on.
The the non core positions and.
And within the non core positions very much focused on deepwater saw 80% goes to core 70% of our spend goes to deepwater and.
And that's pretty much how we intend to run this business going forward.
Can't talk about other companies, but I do believe that indeed, there is a certain degree of hesitancy to invest and the and the and the oil sector.
Because of the uncertainties that we are currently facing and maybe some of the weaknesses that some companies have.
We have decided to deploy our capital.
Preferentially also in other areas and some other companies have done the same so altogether. Indeed, it is not unreasonable to make the case that the whole sector is investing somewhat below what is needed to keep the production levels to where they are.
Now again.
And how that plays out.
And the I E is very been very clear that.
Indeed, we do continue to invest in this sector and collectively in order to keep the world's about supply spread energy and we'll have to see whether indeed companies collectively and the sector collectively are up for doing that.
Thanks Roger.
So silly I was next.
<unk>.
And does he have reinforced from Barclays. Please go ahead.
Thanks, and good afternoon, Hi, Jessica Howard and a T questions. If I could the first 1 and it sounds like to come back to the dividend and they and he said that I think all expenses.
And so they that's nice.
And when I hear it and stay similar to where you are in terms of April 2020 about the kind of day level.
Cool and I guess, I'm, not saying that to anticipate and see.
And I get that you're much happier with take a form and underlying as a business and that and it's taking a blood and things.
And where shell is positioned.
If the performance, 40% that's out there and he.
He feels he might be and then the second part is it closer to this and other times as opposed to this idea and that's called Basketball's could capex, that's capex and.
The 1 for royalties and you can now see but you can be solid returns and interest.
Interest and a place to invest.
And can you just spoke about and look at more how you're thinking about that and how and how you interpret the incentives and a day.
The decisions, we will look and looking at life.
Thanks, very much shell area, let me make a starch Betsy.
The first common stroke question that you ask Jessica will talk about the second 1.
And well, we'll be happier than I expected.
Well of course, we've always been very clear that if the macro improves we will see a better performance and I think if you just do the correlations.
And indeed see that the upside that's the oldest set was a bit of recovery is now.
Playing through.
And I think what's probably S D.
And the most significant part to be pleased with is actually the resilience of the company.
Of course, if you go through a pandemic, where you have so much disruption potentially they turn everything upside down and inside out in terms of your supply chain.
And deep value.
Have a everybody from and office all of a sudden and working from home.
Including people and in our back offices and bear in mind, we have 20, plus percentage of our people and places like China, and Bangalore, Manila, where all of a sudden and not have to work from home. Yeah. Indeed, you ask yourself. The question do we have.
And have the contingency plans for that and how will we see ourselves through it and if you're done and look back on how we have managed to do so.
I can only be incredibly proud and very grateful for the quality of our staff and the quality of our operations. So in that sense, yes. It is a positive surprise well I'm very happy with.
And so when you put it that way.
But of course, the macro is outside of and that's the factor that's come back I think is good news for all of US and also gives us the confidence to think that the choices that we have made them distributions are resilient and robust and sustainable.
Jessica.
It's Lydia.
Thanks for the question in terms of how are we thinking about cash and cash capex going forward now that we're moving to a different phase of our capital allocation.
We tried to provide a framework that was less clear in terms of how we want to run the company and what our intentions are as we as we come out of the pandemic and have said world are improved.
And certainly our cash flows grow.
Which.
We've taken today without first stopped in terms of increasing shareholder distributions. So the framework was dividends and base cash Capex, reaching 65 billion, which we've achieved that then gets us to the third priority increasing shareholder.
Improvements and then the fourth priority, which is additional cash capex and further strengthening of the balance sheet. We are only getting to the third priority today at this point and time and we're gonna keep keep cap Cana and keep cash capex.
And $19 billion to $22 billion and in 2020.1.
Does it go into 2020.2 and.
Distribute backrow continues to to perform as it currently is and the company keeps delivering we'll be able to move to about fourth phase and how we're thinking about that force phase without force priority route rather is that we need to optimize our capital allocation at the group level, we need to make sure that we're providing a compelling.
Return for our shareholders, which.
And hopefully today was an important step step forward on that second piece is to ensure we've got a strong balance sheet and the third piece is to is to grow and we need to make sure we maintain and.
And serve all of those priorities through through time, when we move to the next phase of cash Capex, we want to do that in line with shareholder distributions and that's why we put shareholder distributions and the third.
And if something versus let's say the fourth priority and so I would see a relationship between those 2 things, but importantly above and above.
Above that is ensuring that we maintain a disciplined and measured approach and that next step of cash capex and so.
We indicated before that next step would be somewhere between 23, and <unk> and 'twenty 7.
We'll provide more guidance in terms of what we expect and 2022 and the second half of the year, but that's an indication and in terms of what we're thinking the next step up needs to be measured.
But I wouldnt necessarily indicate that then it would be at the high end of that range at this point and time, it's important for us to stop.
So each phase of this and are very.
Disciplined way demonstrate we are driving the returns that we want to see from our our cash capex.
And but it is important for us to invest in and the company continue to grow investments to support the energy transition and I expect we will we will have some pick up of that and 2022.
Thanks, very much Maria.
And Syria and the next question please.
Alastair Syme from Citi. Please go ahead.
Thanks for taking my question and it's very much a follow up to the last question and so just to clarify even if you had an incremental dollar of capital is as per that priority before.
Is there a specific business area that would go into.
Where does that where does that allocation happened across the business.
Yeah, Thanks, very much and I'll spell it.
Let me take that question. So I think it it doesn't necessarily always spooked by the incremental dollar and it's not necessarily that will find.
Where do we have the highest return ultimately that's not too bad decisions present themselves and.
And a company of our size and makeup. So what we are doing is very clearly when we lay out the allocations on what we call level 2 so below the sort of shareholder balance sheets.
<unk> cash Capex level, you basically say this is by the strategic priorities of the company. This is what we aim to achieve and our portfolio. These are the utter our business objectives that we have this has been our risk appetite is and now we allocate a certain amount of capital to these particular sectors of the company.
Upstream.
And integrated gas chemicals and products or whatever it is.
The renewables and energy solutions business, Biofuels hydrogen and Ccs etcetera and of course, we have an idea of what the opportunity set this and if we don't allocate money to those businesses that don't have opportunities with very clear about what our return expectations.
Stream and redesigned the mix of the cash capex on the basis of the strategy that we wanted to pursue and.
And what we had been saying is very COVID-19 to 22 is made up of this breakdown and you will find it on the slides that we have also published this morning and it's the same as what we said back in February and when we go.
The next phase B will give you a breakdown of where we think the level 2 capital allocation will go to at that point and time would be kind of already say is people have a preponderance to invest into the growth pillar of our business. So in other words, the customer and and where we believe the future of energy is calling but at this point.
But it would be premature to just say the next dollar book go down.
Thanks Alastair.
And Cecilia I can have the next question, please which I believe is also the last question.
Peter low from Redburn. Please go ahead.
Hi, Thanks for taking my questions and just.
Another on the macro outlook you struck a very positive tone today, which is welcome but quite a big change from a year ago can you, perhaps outline what led to that change and what it is you're seeing and your market in particular, that's giving you this newfound confidence.
And then just on the cash Capex. This year, it's company annualized and for the lay of the ballroom and up to 9.
<unk> $22 billion range.
Is that simply a result of phasing and should we expect a step up investments and the second half and perhaps what drives that is it was zooming on projects. Following the end of Covid restrictions are any color that would be helpful. Thanks.
Yeah, Thanks, very much Peter Jessica why don't you talk to the second 1 and I will and but the positive.
And if Don.
Excellent so I think Peter.
Peter you you've touched on the points that are relevant and indeed, the first half.
A little bit lighter in terms of Capex, that's not unusual for us that we have a bit of a pick up and the second half and as you mentioned, particularly post COVID-19, there's still working we're still working through.
Trains getting south market sites et cetera. So that is also impacting.
Some of the spend and we would expect a step up and the second half of the year that being said, we're continuing to drive capital efficiency and we're getting more for each dollar of but that's not so much the driver of this this year, it's more about pace and timing.
And again that will pick up and the second half of the year and.
Yeah, Thanks and previously.
And because of your question on <unk>.
What's the difference is we lost share and this year.
Well last year, we were at the beginning of a pandemic and this year. It feels that they are at the end of the pandemic last year. When we were looking at what was going ahead and.
Supplies being ahead of us.
And it was a time of prudence and.
And we felt that financial resilience could be significantly at risk knowing what we knew at that time could happen Independencia and therefore, we had to take some really bold decisions and we did so we took out $20 billion of outgoings.
And at periods, a lot of it and capital a lot of us and operating costs. We contained our working capital is very very significantly and that was the first $10 billion and then indeed. Unfortunately also in terms of shareholder distributions now what happened as a result of it is we have seen that we could not only preserved our financial.
Well go to the company B could actually improve it. So you will have seen since Q2 last year, we have paid down our debt with $12 billion.
At the same time by the way absorbing a very significant amount of working capital and that shows how much needed and how prudent these measures flow, but at the same time.
We've also seen how well the company has performed incredibly.
Incredibly well from a people perspective incredibly well from a asset resiliency perspective incredibly well through the supply chain that we have and now we are looking not only at a pretty sort of positive experience from that perspective, but also a very positive.
Outlook and the macro the vaccinations are working and many of our very very profitable markets. We see a tremendous resurgence of volumes, whether it's oil or gas or chemicals et cetera, and therefore, there is I think grounded reason for optimism and that is basically what you see back and our results today and our decisions.
And today confidence and the few terrestrial.
And with that I would like to close it. So thank you again for all of you attending thanks for your questions and I hope that and the last salaries and so we've given you some insights into how we're getting all of our strategy.
And what about the shareholder distributions, how did that come about et cetera.
But also the performance of the quarter as such so what that's meant to do is to wish you a very pleasant and of the week and I Hope you and your families stay safe and stay well. Thank you very much.
And this concludes the session. Thank you for your participation you may and Andy.
Per call.
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Lisa.
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