Q4 2022 Shell PLC Earnings Call
While also leveraging our unparalleled customer reach to develop the scalable and profitable low carbon products that are urgently needed.
Shell under my leadership, we will work to be the trusted partner of choice as the worlds energy systems transition for our customers government and investors.
By doing so we aim to deliver competitive returns and create significant shareholder value over the coming years now lets look at our Q4 and full year results and financial framework and for that let me hand over to Janet Thank you al.
By continuing to provide the energy our customers need we have again produced strong results.
Our safety performance was impressive we made good progress in both personal and process safety year on year.
We also made good progress on carbon by the end of 2022, we're more than halfway towards achieving our target reduction of 50% by 2030 for scope, one and two emissions moving to our financial performance.
Our adjusted earnings for the fourth quarter were $9 8 billion with strong contribution from our integrated gas business and.
We generated $22 4 billion of cash flow from operations, including a positive inflow of $10 4 billion of working capital.
These strong quarterly results helped us to achieve our highest ever full year results with adjusted earnings of some $40 billion more than double those of last year and around $17 billion higher than in 2014, when Brent prices were similar.
We delivered a full year cash flow from operations of over 68 billion.
And so our organic free cash flow was $1 $48 billion.
In 2022, our financials were impacted by additional taxes of around $2 $3 billion.
Of this around $1 5 billion related to the EU solidarity contribution in the Netherlands, Germany, and Italy with cash outflows expected in 2023 and 2024.
For the U K and achieve profit levy the impact of some $900 million.
Now onto our financial framework.
Our strong performance over the year has allowed us to enhance our distributions to shareholders or.
Our total shareholder distributions for the year were around $26 billion.
In excess of 35% of our 2022 cash flow from operations.
And today, we have announced a new $4 billion share buyback program, which we expect to complete by the time of our Q1 results announcements.
As planned we have also increased our dividend per share by 15% in the fourth quarter.
Trading discipline, our total cash capital expenditure for 2000 $20 billion to $25 billion.
For 2023 is to maintain the $23 billion to $27 billion range absorbing inflation.
Our double AA credit metrics ambition remains we intend to continue to reduce our net debt as part of our robust financial framework.
Finally, we will continue to target shareholder distributions of at least 20% to 30% of our cash flow from operations.
Now I'll hand back to awhile.
As you've heard our results for 2022 were strong in what was a volatile external environment. So what do we expect to see for 2023.
The balance between global energy supply and demand remains extremely tight small changes on either side can have a significant impact so volatility and uncertainty will continue to be the watch words in 2023, and how we will show respond to that with confidence in the direction of our strategy and the strengths of our businesses and with discipline and a focus on value.
We've worked hard over the years to strengthen our portfolio, we have a clear strategy empowering progress our focus now is to further operationalize and profitably deliver this strategy.
We will build from our strengths, where we will prioritize value over volume, while reducing carbon emissions in upstream we will continue to proudly deliver energy that the world needs, while driving strong results with our high graded portfolio and integrate the gas, we will leverage and extend our world leading LNG position.
And in marketing, we will build on the robust performance that we have seen in recent years.
Performance will be top of mind in every area of Shaw, we aim to demonstrate progress at pace not through words, but through our results and we will continue to simplify our organization. One example of this is the more align and focus senior leadership structure that we announced earlier this week with fewer rules and greater Accountabilities.
Simplifying decision, making by building on our strengths focusing on performance and simplification, we intend to deliver compelling shareholder returns show is already a great company and we are determined to be a great investment.
And to give you more insights on how we plan to do this join US in New York for our capital markets Day in June .
Thank you.
We will now begin the question and answer session.
People dialed in if you have a question please press star one.
If you wish to be removed from the queue. Please press star two.
Phone calls are requested to mute the audio on the computer webcast and listened attentively to their telephone audio as we begin to progress through the telephone questions.
Thank you for joining us today, we hope that after watching the presentation, you've seen how we delivered strong results and how we intend to further operationalize our powering progress strategy today, <unk> and I will be answering your questions and now please could we have just one or two questions. Each so everyone has the opportunity.
And with that could we have the first one please then.
The first question is from Oswald Clint at Bernstein. Please go ahead.
Oh, Thank you very much and good afternoon to both of you and welcome to the Q&A interrogation.
First one on capital investment please.
<unk> levels looking into the year in line with your guidance. That's good I think Shane mentioned the.
The guide is also absorbing inflation. So I was curious just how much and where youre experiencing those hot spots at the moment.
It doesn't imply any activity has to be phased are pushed back in.
I see within Capex marketing steps up a bit this year I assume that's nature energy, but I'm just looking at marketing wandering the earnings there is still a little bit below trend and does Asia reopening here really start to help the.
The earnings trend within that marketing business that was the first question Secondly, I'd love to ask about integrated gas.
While you mentioned volatility uncertainty your watchwords for for this year, we obviously had one hiccup last year around this business around hedging. So curious to know what the lessons learned where from 2022 months the hedging strategy for this year, if theres any changes needed in that approach. Thank you.
Super Oswald Thank you for that.
I appreciate being here for the interrogation I guess I'll get used to it let me start by maybe giving you should hit the floor on the marketing question and maybe also the integrated gas learnings I can reflect a bit on inflation in a moment certainly 17th.
Thank you for that also in terms of marketing so taking a step back for a moment, sorry, 46, 5% ratio side. It's number one in labs, if anyone can make substantial returns out of this it is us we are well positioned for us in saying that I agree.
$400 million of earnings for this quarter was a little bit disappointing, but if you take a step back and look at why so what we're very comfortable with us seeing the fact that Covid has really not completely played out so were still seeing the impacts of that and you're right you pointed out China as well. So we have great expectations for with China opening up to be able to see that advanced and green shoots already and particularly on our <unk> business.
Of course, we have a bit of a parachute effect, the normal where the high cost of the inputs. It takes a while for that to be pass through as well so those combinations, including with our differentiated offerings. We're pretty confident in terms of how you will start to see some of our marketing results begin to improve.
Second one was.
In relation to IAG and the volatility around us.
I'll take a bit of an opportunity also to take a step back we've talked before about the fact that for you.
You really need is our integrated gas you need to look at it over a series of quarters not one specific quarter, we use price risk management hedging is price risk management and we use it to look at the exposures, we have across periods, not specifically quarter by quarter by quarter of course that does mean that you see different things play out with <unk>.
See correlations, becoming more or less effective this quarter you saw I mean very effective because we didn't see there's dislocations between the EU and in fact, J Cam et cetera.
Let's breakdown, so typically temporary and that's what you saw is that chemistry. So this quarter hedging acting very much Santander, that's what we like.
Thanks for that and then also with your first question.
Just to play back so the 23 to 27 billion includes a few things one we have said that it will include nature energy, which you know is to the tune of around $2 billion.
Secondly, we've also said.
It includes general and organics. So thats also within that number and then thirdly. Indeed, there is inflationary pressure that we're absorbing inflationary pressure we're seeing at the moment is in the range of say, 10% to 12% typically.
Event, where being able to mitigate a decent portion of that but not all of it.
Most of the mitigation come from.
Long term contracts with suppliers, where we have these enterprise framework agreements that we can lean on because of the scale of our purchases with those suppliers. So that allows us to mitigate to mitigate some of the exposure.
You talked about delaying projects and the like.
There are examples of that of course, we took the decision on Gaza motto, which is our Brazilian offshore opportunity.
Recycle that project because of the cost estimates that came in were higher than we were comfortable taking the final investment decision on and so with a disciplined focus on our capital allocation. We said this is not the right time to do it and therefore, we punt that until there is a better environment to be able to invest and so hopefully that just gives you a bit of a flavor of how our thinking has gone with.
Awesome. Thanks for the question and then can we go to the second question. Please.
Second question is from garage Bull Katara at RBC capital markets. Please go ahead.
Hi, there thanks for taking my questions I've got two please the first one is a.
A few days ago, there was some headlines around you're looking to review your.
U K electricity business.
I was just wondering I know this is not a huge part of the portfolio, but is this part of a broader review of your low carbon efforts or is this specific to this business because I guess, if I look from the outside in and this is a very low margin business that actually has needed call of capital given all the volatility in power prices. So just wanted to get a sense of what has triggered the review there.
And the second question is on the in the upstream so in 2020 2021 you put out your emissions targets.
As it relates to any transition and one of those was declining oil production once 2% Brian .
If I look at the last two years is down something like 10% to 12% so clearly.
You've moved along faster on some divestments and so on.
And that's been a part of that so.
Given you're well ahead of what you intended to be on that front. What does this mean for upstream volumes going forward should we expect more stable production now or even growth because I guess.
The realities of the energy market are very different to when you put those targets out there as well.
Just some thoughts on that thank you.
Super Thank you for that barrage.
I'll take both of those and.
And start off with the <unk>.
So shell energy retail.
The broad the review of <unk>.
Specific to assume its not a broader review of.
Low carbon investments Ultima.
Ultimately we are looking at every single one of our investments and it's unique and it's.
In its own right and trying to understand whether we can totally unlock the value out of that investment opportunity.
Total energy retail what we have found is despite a few years of trying to make that work as part of an integrated value chain.
Market conditions are just structurally not there for us to be able to create the returns we expect.
We have seen significant interventions from the government, including price gaps, including windfall taxes, we have seen nationalization in that sector.
And so it is not a structurally advantaged sector for us to play in here in the U K.
It also meant we had to review, our German and Dutch positions because they run off a lot of common infrastructure. It wouldn't make sense to look at just one of them in isolation, that's what triggers the review and our ability to be able to understand how we can.
Or what position we need to take going forward, then that'll take a few months our broader low carbon opportunities.
Like everything else also in our upstream be assessed on their own merits opportunities that we can see running room, and we're going to continue to scale up and invest in growth and we've seen some of these opportunities and we can talk about that as well in the coming in the coming.
On the on where we are with upstream.
Having had.
The privilege of being wish and aid in the upstream business at the time when we set these targets.
We have indeed moved very fast on being able to monetize the parts of the portfolio that we felt did not fit into the broader core of what we wanted in the upstream and just as a reminder, we've done a lot of work in the upstream over the past several years to the fundamentals and the high grade the quality of that asset base.
I referenced earlier in the morning, the fact that in 2014 at the similar Brent price we were delivering.
We had.
We had.
In 2022, 7% less production than we had in 2014, yet we're able to deliver some 80 plus percent free cash flow and 70 plus percent earnings.
And therefore, the quality of the upstream has significantly improved as a result of this focus on value over volume as we look into the future longevity of upstream in our upstream resource is a key focus area for me and for today, that's going to be something we focus on more on exactly how that looks I think is better discussed in our call.
Market's day in June 2023, but longevity is a core part of our focus.
Thank you for that for those two questions Mirage. We can go to the next question. Please then.
The next question is from Christopher <unk> Bank of America Global Research. Please go ahead.
Thank you good afternoon, well in Tonight.
Let me.
I take your comments and ask you a very mean question.
What else.
Did you feel like you cant tell us today that youre going to focus on in June .
So I apologies already for that for that question, but.
Maybe I might want to make a suggestion.
To review that payout ratio, how do you feel about the formal 20% to 30% as.
As you've highlighted you've gone well beyond that it.
It seems a little outdated. So hopefully we can look forward to an update on that front as well as the longevity point that you just made so any other thoughts in terms of what keeps you busy as you prepare for June would be great and I'm not asking for a full preview effects events and then a quick one hopefully pushing Nate just wondering whether you can give us a little bit of detail.
In terms of what you expect into Q1 Q2, when it comes to both the networking capital potentially a bit reversing as well as those derivative margining costs that went the other way in Q4. Thank you.
Thanks, Chris I'm going to ask <unk>. If you want to cover Q1 Q2, and maybe also the point around distributions for 2000, and then I'll come back and cover any other items on on June Super MTS. Thanks, Christopher.
Specifically on working capital.
So in terms of the working capital we've had comments in the past about the fact that our working capital has been at night sight right. As you saw this quarter. It was a substantial inside of over $10 billion.
All of this as well.
Volatility comes with working capital our working capital comes from volatility is probably a better way of putting us in we are in a great position, where we have the financial framework that allows us to take this and have the capability to make money from us of course.
As we play through that what are we expecting to see.
In terms of the working capital that occurred this quarter there were a number of things price that Kim Don obviously impact as we saw a change less outflows with respect to marketing, which you referred to as well and that was signed to active management, we really looked at one of the right returns we need for that side of things for the margining on some one off.
And those one offs, we saw quite a few.
People actually prepaying us twice in your answer their own form of active cash management and we also saw of course and some cash deposits from some of our joint ventures, who have to pay tax in January rather than.
In December so just a change in terms of high taxes are playing right for them.
Specifically to your question how much do I expect to see I'm, probably saying 45 billion of that number that came in I would expect to see flower right. Now of course, that's just simply about things that will reverse in Q1.
High working capital will play out will depend on as you well know the pricing and the different deals that we do during that quarter. So I won't speculate more than that I would say that our marching we're very active at looking at and we're ensuring we have the appropriate return for us.
You also asked about the payout ratio, which I think you said with <unk>.
With respect to the payout ratio as you know we've been quite clear on this and the fact that we have 20% to 30% range of CFO .
And taking a step back from that as well, 2000% to 30% as you can see when market conditions and economic conditions that go beyond that so you can see in the course of the year, we actually got to 35%.
The other thing I'd say, that's about an effect of having 20% to 30% through the cycle and that's why we are very very clear on the fact that it is a soft ceiling and a hard floor at the house.
Thanks for that unit.
Let me touch on the broader question of what to expect in June .
Chris it's worthwhile to sort of restate here that I continue to believe that our powering progress strategy is the right strategy for us and that the focus that at least I'm really keen to bring is how we're going to operationalize that strategy.
We start from an.
An incredibly privileged position when you have something as strong as your current core upstream business that is delivering significant value higher margins strong strong performance overall when you have this world, leading integrated gas business of which we've been able to build significant strength as one and 2022 with the many announcements we've made and when.
You have the customer interface that we have with a very strong marketing business. We start from a very strong position and we recognize that as we as we move forward. We can continue to grow and strengthen that position, while continuing to decarbonize, our own assets and help our customers customers decarbonize their energy.
So that core is very very strong, but there's two pieces that I have said and I'll continue to reiterate our focus is going to be on performance and disciplined.
Performance is going to be very much about how do we continue to drive operational excellence in our business.
How do we focus on making sure that we are getting the consistency and predictability in our overall results.
And so that has all sorts of elements around how we think about working capital and the like but also how do we continue to be lean and fit and what is an inflationary environment. So those are all elements of the performance and why do we focus on performance because I think there is a lot more running room in the company I know we've left money on the table in my previous business in integrated gas. This.
Here, so we can do better than that.
We want to really drive that performance and ultimately to your question around distributions. If we can drive the performance to its full potential we will have sufficient cash to be able to distribute even more to our shareholders and thats very much a core part of our focus and when it comes to discipline, it's about making sure we continue to be ruthless in.
Our allocation of capital towards the value enhancing opportunities, we see there and so you'll hear a lot more of that I've, given you a bit of a preview and you'll get a bit more of the details as we work them out over the coming few months, Chris. Thank you for that question and let me ask them for the next question. Please.
Next question is from Lithia rainfall at Barclays. Please go ahead.
Thanks, and good afternoon.
Hey question second uncertainty weigh on the Exec Committee changes, you've talked about making the business simpler and that <unk> mean greater cooperation.
<unk> been in state well in practice, a changing about that capital allocation process and what leaves it to the better effectively and then just picking up on what you're saying about the operational performance and particularly in integrated gas. It does look like that has been disappointing relative to history.
What can actually be done to improve that performance.
Just in terms of any kind of gap that you think is really that we need to look at.
Yes sure.
I think on the first one on the Executive Committee changes I, just mentioned to Chris's question. There Lydia the fact that performance and discipline were key going forward and those were the two that also played and the decisions around the executive Committee changes and let me, let me elaborate on that and through that maybe pick up on the operational performance question as well.
The structure, we are creating is one where we're trying to minimize interfaces to be able to really allow the frontline to deliver the value that is needed with clear line of sight that the business directors have in this case, our upstream integrated gas director as well as our downstream raise directors to have clear line of sight toward.
Awards, those business outcomes, while the integration of our strategy as well as finance as well as M&A into one shop that will report into shade is meant to be able to allow us to ensure that strategy capital allocation.
The monitoring of performance to make sure that our capital is being allocated to where we see sustained strong.
Strong performance that loop has been sort of cut across the different parts of the organization comes together now and so when we talk about discipline is our ability to be able to look lifecycle at the choices, we make and the way we allocate capital and continue to improve the way we do that in an objective way unemotional way rather than leaving it to each business too.
To sort of try to pitch for their own capital. So that's that's really a core part of it.
And that strength when you talk when we talk about operational performance and coming to the integrated gas assets I want to maybe correct. The bits of an impression because there's two things that.
We're working on hard in integrated gas, there's one element around feedstock in certain areas like Nigeria entrant that has nothing to do with performance. The assets are doing very very very well.
Problem is its really challenging in Nigeria, given sabotage the pipelines and the like to be able to get sufficient.
Gas into the system, if we can overcome some of those challenges the machine runs well and Trinidad it's simply a lack of gas supply and you've heard recently that the U S government has.
OPEC has allowed now Trinidadian government and shell to consider bringing gas from the Dragon field in Venezuela.
So those are the sorts of solutions for that part of the problem. The other two.
John as we've had is in particular, probably has been challenged and that's one that we are very focused on right now with the team and the leadership in Australia is really looking at forensically at what are the things that could potentially mitigate further challenges.
That's what I would say at this stage with you around where our focus has been thank you for the question.
John can we go to the next question. Please.
The next question is from Mikael <unk> from Goldman Sachs. Please go ahead.
Thank you very much while in Schmidt and really congratulations for the excellent delivery in the quarter.
I wanted to ask two questions. The first one is about the EU Green taxonomy, it's going to be one of the biggest new regulations from an ESG perspective in Europe , it's far from perfect, but let's see.
<unk> offers an interesting insight.
Change towards a greener company with especially the percentage of Green Capex and I was wondering if.
<unk> had an initial assessment of what percentage of your Capex would be green taxonomy aligned my my second question relates to the.
Gas market one of the largest players worldwide. It seems to me like the market is getting a lead to be too relaxed about the risks in the second half of the year the pricing is.
Moving away from substitution.
Gassing Thanksgiving industries are restarting in the EU and I Wonder if we run into a risk of potentially having another crisis sweeter and how how you think you can position yourself to be.
Is positioned to benefit from day. Thank you.
Thank you for those <unk>.
Do you want to start off with you and Dave and David.
Really interesting on the EU Green taxonomy because.
As you know it will play out and be delivered across just a different period of time, whether you are in the EU, whether youre at potash in OPM and the U K the timing of that would change what you can do is actually if you look back at our annual report from last year and you can see where we actually showed a breakdown of HUD taxonomy works actually the spend that we would say.
Well I mean sort of described our points why we didnt.
Feel the taxonomy was actually property wireless et cetera.
Taxonomy is paying off as you know definitions are being challenged at the moment.
If that will happen. So I would say look back at our and one from last year. So from 2021, and you'll get a very good indication of that.
What I would say is while of course is that we want consistency. That's the main thing we have so many different regulations and rules that are coming whether it's from the U S vendors from the EU and its coming from the U K or benefit all of US is to have standardization transparency, where we all use the same definitions and we're very keen to see that as an industry of course, what we said before.
Add to it this morning, several times as well.
If you were to look at our Capex and Opex together, we would say that one third of fast approximately at the moment is spent on low carbon or zero carbon investments our expenditure as well.
Thanks, very much and I indicated to your question around gas markets.
When asked this morning.
Both CNBC and Bloomberg My answer was the same that we are not out of the energy crisis in Europe far from I think and I.
<unk>.
I would think I would agree with your points.
That there seems to be.
Some who feel that it's all back to normal. This is I think a multiyear energy crisis.
And we're going to have to collectively figure out how we address that.
Why do why do I say that.
I think just looking at some of the facts so last year, what happened with <unk>.
Russia was roughly two 5% of global gas demand was taken out.
Because of the.
The reduction in gas supplies from Russia into Europe .
That caused havoc in the markets as you know well.
What supported or what bridges the gap of course LNG played an important role mild weather played an important role and critically demand destruction also played an important role.
Let's take the first one.
There isn't a huge amount of LNG coming into the market over the next two years, it's around 20 million tonnes is what we see.
That's about it in that.
One shouldn't also forget that many of these machines have been running hard now for a good year end.
And you are beginning to see some of the some of the challenges and just the reliability of the machines around the world. So that's that's an issue.
The second issue of course is.
China was the one that diverse with roughly 50% of its LNG to come here to to Europe , where 50% of Europe's needs was met with diverted LNG cargoes from China that might change or is likely to change given where things are going with the recovery the economic recovery in China.
So you look at that you.
You don't want to be in a position to be depending on the weather as your savior or the fact that youre going to destroy more demand and so I do think this is a multiyear issue we've been very vocal with governments here in Europe that we're going to have to need to move faster with the shell due as a result of this of course, our portfolio has typically been positioned for northern.
Hemisphere winters, that's why we typically have our lungs.
We of course work on significant support in storage this year or last year sorry.
Invested in storage in Germany, and in Austria, which was part of where we use our working capital for example, we're investing in projects right now we have Pierce Depressurization, that's coming on stream and Penguins in the UK. So.
We have a lot of opportunities to be able to supply the market and of course create value through the.
Through the tremendous portfolio that we have in LNG.
Thank you for the question that <unk> can we go to the next question. Please then.
The next question is from Christian Malik J P. Morgan. Please go ahead.
Thank you.
Congrats on the results two questions from me.
Yes.
So big.
Semi related.
On the industrial and financial logic of renewables at this stage of the energy transition one of your peers.
So that appears to be doing any vacuum renewables aimed at the returns proposition or evolving.
Can you share your views in the case of scale.
This is Julian future M&A.
Organic is of the timelines around.
You think about the transition in the colon Jake so clean energy.
Second question is regarding the oil.
Specifically, what does it take for you to grab.
The bull by the Northern best break out of the range. You provided is it still seems somewhat lukewarm Charlotte the use some agents who are leaning into phase III shale.
You framed the mood is more volatile and uncertain.
And you were talking about energy prices again.
So I'm sure that you understand.
What are the key milestones relating to see future.
So to step in and can be the crude side. Thank you.
Super Thank you Kristian for those two questions.
<unk> do you want to start with the industrial and financial logic of.
Of how we're thinking about renewables.
I'll keep it simple Christian it sounds like you are in an airport.
With either die.
Im saying on that is the logic is very simple for us we look for us to whether any of the investments that come to us are fitting our strategic.
Our way forward and then we're looking at very much higher.
How does that fit in terms of the returns profile and we probably had this conversation before on that.
Each investment has to fit both aspects of it and on the return side, what we're saying of course the insights we have many different projects that are open to us. So we're not short of investment opportunities and finding the right one where we can actually differentiate and you can get those specific returns.
Very comfortable that we have the right strategy for that so that's why we're going to have in terms of are we dialing back or any of that side of things you can see from our capital investment we have a very healthy budget within that.
Side of things with respect to renewables and respectively, well it depends of course on the returns that we see as those come through and that will continue to be the case at the moment, we're seeing good opportunities <unk> being a great one way of course as you said.
<unk> quite fit strength, we're good at molecules, we're able to monetize them.
It's different locations and of course, having the sort of business that we have with a number of customers to be able to do it to decarbonize them, it's a very clear logic as well.
Thanks for that <unk>, let me take the the oil bit Kristina I think.
First if you step back I think the strategy that we have is a very balanced strategy I mean, we're playing the game for the short medium and long term. So we're looking at how do we create value for our shareholders today, but also how do we create the value opportunities for 2040, when the energy when the energy system.
Will be fundamentally different by the way by 2040, I'm still convinced you want to need oil and you're going to need gas and you're going to need a lot more renewables and so our strategy is one that's saying how do we how do we play across these multiple energy forms, but really focus on the opportunities that create the most value for us it looked like what we've done in upstream.
Where we have gone to the core of eight countries and really double down and youre seeing the benefits of that through margin margin expansion and our ability to really focus on value drive.
Does that mean, we will continue to look at that absolutely you've heard me say earlier as well we will continue to look at how do we have longevity in our own business, but I would also say.
I Love. The fact that we have a world leading integrated gas business that actually has a significant portion north of 70% of our term contracts indexed to Brent.
I want to continue to grow that part of the business because I can get exposure to the business that we are uniquely differentiated in that gives Brent exposure and at the same time, where we are able to have much more resilient as we go through the energy transition because of the lower carbon footprint of that business.
That is at the core of the strategy and so we will continue to follow that and we've built on that in 2022.
The north field expansion North field South.
Our ability to be able to pick up significant volumes from the U S through venture Global Mexico Pacific Limited and so we're really putting that strategy into action to be able to grow without necessarily saying. It's just has to be oil, but oil exposure is a good thing for us as a company and Thats what were really looking at exposure to <unk>.
<unk> is going to be important.
For the question Christian safe travels wherever you're going as well.
Then if we can get the next question. Please.
Our next question is from Irene homeowner at Societe Generale. Please go ahead.
Thank you good afternoon.
My first question if I can go back to the cash payout ratio. Please.
You point to 20% to 30% through the cycle and said, 5% at current prices.
To be fair that 35% was clearly helped by the proceeds from the disposal.
My question is can you give us a sense an indication of what will U S. D C. The Brent oil price, which you would consider as well.
Average through the cycle, and which would therefore correspond to the Santos to 70%.
And then the second question is just a numerical one on Reg.
Capital employed more than doubled basically with JD.
Q2, and the end of the year I presume this was due to the spike in power prices, possibly.
Well working capital for trading is that is that correct or is there anything else.
The increase thank you.
Thanks, Joe and thank both yes, I'll take myself on the Revlon Irene.
Simply put this to make sure I know youre completely right on working capital are part of institutes power, but a large part of it is today with the build into storage. So we talked about earlier, Germany and Australia also some storage in the UK of course as well. So you saw between Q2 and Q3 you saw that go up is a little bit of that come to mind in terms of the storage side of things as well.
As it played out so that's that's partially for the cars there that will play out has seen really side of storage as well.
If I were to look at the first one as well that you ask one to payout ratio.
Fundamentally it.
If you say Permian, it's still about 30% as well so I do acknowledge yes, the Permian is than that but of course, that's part of the capital allocation that we have we make choices about which assets. We are best kept the best suited to keep a mix shift.
The portfolio as well of course that has implications on the CFO as well a place for it but we were over 30% and either way that you look at it we tend to look at in terms of price because you were quite specific on the price I'm not going to be drawn on what specific price. It is as you can imagine we look at scenarios, we don't look at one specific price.
Strip, probably quite sensible as you can imagine given high volatile we've seen in the last year as well when we look at the different aspects of that and that's how we play out as we planned.
And just next quarter, but as the cycle as we look to invest.
Thank you for that and thank you for the question then can we go to the next question. Please.
The next question is from Patrick Ho.
UBS. Please go ahead.
Yes Liberals. Thank you for the presentation a couple of questions from me. The first one slip on renewables and the changes to the Executive Committee.
Can you comment on the rationale for keeping vehicles, we have to downstream and whether it has any implications for sort.
So the strategy for renewables and then secondly on chemicals.
The startup of the.
Sure.
When I got in the chip, making.
Full contribution.
How long do you expect for that to ramp up to get to full contribution.
Contribution to earnings and should we expect to regain improvement came in the first quarter.
Thank you.
Want to take the second question so sure absolutely.
Thank you yes.
Shell polymer.
Monica, it's really great to see is actually starting up and beginning to run straight is quite exciting when you actually there and just to see it.
The ramp up you can imagine with anything of the size.
Say, we get up and running within a couple of months.
Always takes approximately 12 months by the time, you run up and get certified on the quality of the products et cetera. So that's what we're seeing so youll start to see it play out in the results more and more a question of getting all of the costs coming through now that we're operating the true value of it will take approximately 12 months to play out and then you'll really see anything.
<unk> then on the first question on the on the.
The rays downstream grouping.
Dialed back to 2017, when we started the renewables business. It was really in essence, we were looking at how do we think about power how do we think about hydrogen how do we think about Ccs and so that's been evolving and what you have seen in particular in 2022, we've made some big moves right. So we've made.
And then final investment decision on a green hydrogen project in Rotterdam leveraging our.
Our requirements in Pernis, while at the same time being able to leverage our leading.
Commercial road transport business as a potential sync for that green hydrogen and leveraging of course also the very strong incentives from the European government. We've made moves in India and in the U S around spring and <unk>, respectively, and we continue to look at those opportunities. So we have a good base.
<unk> of course, as we've always talked about a customer back strategy and the majority of our customers have traditionally sat in a more conventional business in downstream.
And so there has been quite a bit of an interface between renewables and downstream what products should we be selling to our customer and the like and so what this is doing is actually it's strengthening our ability to access customers with green products that we are developing in our renewables business. If also harmonizes things speakers currently by.
Our fuels for example sits in downstream doesn't sit in renewables EV charging sits in downstream, even though the power generation and power trading since in renewables. So this is bringing cohesion, removing interfaces and duplication and allowing us to make sure that we can deliver for our customers the decarbonize products.
And then being agnostic as to what Green Elektron or green molecule. They want just trying to maximize value for the group from doing that.
You for the question.
Dan can we go to the next question. Please.
Our next question is from Lucas Herman at Exane. Please go ahead.
Oh, thanks, very much and ultimately both of you.
A couple if I might.
This is probably directed at you because it.
LNG in the first quarter.
Look we've had a year of considerable volatility you're a month into the quarter prices, obviously being volatile, but can you give us any help in terms of how we should be thinking about the way that the current quarter is likely to shape up and LNG, sorry, So short term.
And perhaps staying with.
Yeah, if I go back to the last quarter gas storage.
Gas storage you indicated the benefits that would be seen through the fourth quarter that maybe the first quarter were all in and that process is it all being released to the benefits being seen.
Please just commentary around both of those items.
Thank you.
Thank you Tim.
Thanks, a lot.
Indeed.
You're commenting first of all let's start with the LNG one specifically in terms of the volatility and what we expect to see coming into this quarter.
Strong pricing if you go back to what happens with talks about supply seasonality and in effect the dislocations fantastic supply you typically CF.
A bit longer in terms of Q4, and Q1, and we would expect to see that playing out as well hedging will work as intended.
Enough thats not triangular anywhere on that because it will depend on where the markets will play out at the same time, but seasonality on the supply side, we hope and expect to work for us on that of course. It also comes down to how much third party volumes and can actually access as well.
While already discussed is going well and of course the performance of our equity.
Production is well, it's great to see <unk> up and running and performing well at the moment.
<unk> is the gas referring to basically we talked about last quarter I talked about high we had been injecting into storage as well we've seen some been drawn on that particularly around Australia. So that has come off in this quarter, but we still have quite a base in storage as well of course, it's a mild at the moment in terms of the winter warmer if you want to put it that way.
So that will have to play out as it goes through as well at that section eight banks that Lukas Bank can we have the next question. Please.
The next question is from Paul Cheng Scotiabank. Please go ahead.
Alright, thank you.
Two questions. Please.
First.
Well at.
And then new CEO first congratulation.
That how you look at Europe .
The long term.
At the heart of their long term portfolio given the political environment.
<unk> business.
I mean, you've been reducing your upstream exposure in Europe over the past five years, but downstream steel will have a long haul operation data. So I mean, how would you look at that.
And secondly that.
If we look at in the past both shell and Youll appeared.
Paul Cat or.
The wind and solar on the absolute return will be lower than your legacy business.
We pocket, 8% to 10%.
Is that acceptable going forward and as <unk>. When you look at you will you'll be willing to us that just because you have low carbon.
Yes.
We generally have much lower return than your legacy pits. It. Thank you.
Thank you very much thanks for that Paul and let me, let me take both so on Europe .
You are right, we don't have a huge amount of upstream left in Europe , we still have of course positions in the U K, we still have positions in Norway and Italy.
The majority in particular, when you think deepwater is.
As in the U S and in Brazil, and then we have strong positions of course in Kazakhstan, and Oman in Brunei, Malaysia, and so on so you are right to point out that it has shrunk over time.
We still have indeed.
Particularly when you think about.
Our energy and chemical parks, we have the energy and chemical park in the Netherlands, as well as the one in Germany.
Is fair to say that there is a couple of considerations around Europe , we see Europe much more going forward as an energy transition play.
We see a lot more in terms of the incentives that play into Europe , we see our ability to be able to leverage our German and Dutch position in a way as well as our marketing positions in Europe and aviation.
Commercial road transport and passenger transport those lend themselves very well to be able to play in the energy transition and it is in line with where Europe wants to go.
I see a strong part of our focus and you see it you see it with the investments we're making for example, with offshore wind in the Netherlands Green hydrogen in the Netherlands.
Looking at opportunities to continue to decarbonize customers in Germany, and Italy, and so on and so forth. So there is more of that while we continue to be committed to our oil and gas businesses and other parts of the world as well as whatever we still have here, but definitely I think the disproportionate share of capital that's going into Europe is in energy.
Transition theme.
The important thing I keep trying to remind.
The government in Europe .
Is that that capital.
Really needs to be or I need to be comfortable that we see investments stability in the climate in Europe and I have to say 2022 did not reinforce the confidence we have seen AD hoc interventions and windfall taxes in price gaps.
In some areas nationalization and the like of course these are extreme conditions I fully understand that.
But anytime you start to move from trying to manage risks so trying to manage price.
Creates all sorts of concerns in a company like ours, that's investing for the long term.
So I would just leave that out there as well.
I think on on low carbon.
Let me be I think categorical in this.
We will drive for <unk>.
Strong returns in any business, we go into we cannot justify going for a low return our shareholders deserve to see us going after strong returns if we cannot achieve the double digit returns in our business. We need to question very hard whether we should continue in that business absolutely we want to continue to.
Go for lower and lower and lower carbon.
It has to be profitable.
So I recognize that there's a different risk profile, let's be clear upstream hasn't always been in the 20% returns.
On a commodity adjust on a commodity basis, you'll find that the risks typically plays between the 10% to 15% we need to be able to see those sorts of returns on an integrated value chain basis, and the renewables as well and that's what we're focused on and we have great. Examples of that we will share a bit more of that in capital markets day.
Through getting in at the right time through diluting through creating more value all the way down the value chain, but it is important to say, we will continue to focus on value and returns.
Let me let me ask then for the next question and Paul. Thank you for that question.
The next question is from Amy Wong at Credit Suisse.
Please go ahead.
Yeah.
Hi, there good afternoon, a couple of questions from me. The first one is looking at your operating expenses. It seems like it's been creeping up across the group. So could we get a bit more color on what's happening with underlying opex and whether management has plans to address that.
And then my second question is unrelated, but it's really it's more about your upstream and integrated gas.
Business and particularly your exploration strategy.
In area, we hear a lot.
On your exploration there.
I mean, a couple years ago, you told US that your you had a commercial resource base of over 20 years of production.
Kind of rolling that for a number of forward where do we sit there.
Q.
Amy. Thank you do you want to take both of those sure.
So on the Opex, our operating expenditure Amy.
So for this year it has gone up with sort of some 39 billion.
Seeing that number one there's a bit of a Q4 effect, which is always there related to just some of the costs tend to come through but if I take a step back because of course, it's one that I watch very closely when you look at it for the full year. What are we seeing that increase we're seeing inflation hasn't really is we're seeing that come through and just across the different cost basis. We're also seeing of course our DNR.
Decommissioning and restoration with spending more in that space as well.
Good expenditure, but it's also an element of inflation in there as well we're also growing so.
A number of those new investments that come in that Opex to those new ones at the start it's just more we have to get on top of that and it's higher than we're seeing in terms of the divestments that are coming through.
That floating as well and then finally, just the same as everyone else. The utility cost of course have increased their share we're seeing.
<unk> results.
Are we happy with it no will it be an area of focus yes.
In terms of your second question, which was really around our exploration strategy. We have a great exploration team and they are still very much focused on various areas you are seeing.
Some of the progress coming through in terms of and then maybe on some other aspects as well, but you were talking about specifically.
Going to take it back to sort of our reserves numbers there as well so you'll see our reserves replacement ratio of course at 120% for this year as well, but what I would look at there is we've often talked a question you've heard us that many times by volume over value, but fundamentally we want to see the longevity of our upstream businesses.
You have slightly less businesses, and then generating great returns and we're very much focused on that.
<unk> numbers that we see coming through it is a very much Ron and requirements that you have the SEC reporting and we adhere frame very closely to that of course. It does mean that some of the things just don't flow through in those numbers, but its still producing are making us money. So very clearly and is value over volume. So I hope that helps.
Thank you for that unit.
And thanks, Amy Giacomo.
Dan I understand Jacob is next.
Yes. The next question is from Giacomo Romeo at Jefferies. Please go ahead.
Yes, Thank you and good afternoon, and congratulations for your excellent start to the new CEO .
Two questions.
<unk>.
First one is on <unk>.
Because we have seen a.
Disappointing numbers.
Losses and.
Larger just want you to understand whether there is anything you can do there and on the cost side to mitigate some of these effects and whether what you're seeing in terms of the market right. Now like you started a little bit of an improvement.
The second question is on liquefaction you gave us liquefaction.
Guidance for the first quarter.
And it looks just over the what you reported for these four critical Q4 end.
Which was a quarter, where you had.
Quite a bit of hiccups I'm, just wondering what shall we expect.
In terms of.
These ratings Yogi for first quarter.
B a reliable level of liquefaction that we can apply for for the following quarters in 2023 or whether we could see an improvement there.
Thank you.
Thank you very much Chuck do you want to talk about liquefaction I can touch on chemicals.
It'll be very short term the liquefaction.
We put it on a quarter to quarter of course, because it is the best estimate that we have at the time Jakafi. So it's a good estimate for where we are seeing for Q1. They obviously have different phasing for turnarounds et cetera, we don't intend to bring go out without us in advance so you'll see that play out over the year as it faced what youre, saying, it's a very good estimate for Q1.
Thanks, Shannon and John with your question around chemicals, I think Theres a couple of things.
We're looking at this firstly of course, we're at the bottom of the cycle on chemicals, it's painful where we are but this is a cyclical.
Hector of course.
The structural theirs.
We can do about at this stage the performance, we're very focused on so indeed, we're looking at all opportunities to be able to pull levers that we can whether that's from a cost perspective or how do we enhance the topline. That's what the team is focused on continuing to drive hard at the moment.
In addition to that as we continue to play out the strategy that we have which is shifting more and more away from commodity chemicals to intermediate and to performance chemicals. That's an important part of it and we have some good opportunities to continue to do that.
Earlier, we talked about shell polymers monaca the whole point of continuing to certify. These 40 grades is to continue to actually adds value to the molecules we have it.
The pellets, we have and to be able to make sure that we maximize the return that we get from.
From selling there so all sorts of ideas being worked to ensure that we count or the cyclicality and already when we start to move back up the cycle to be able to maximize value for our shareholders from that.
Thank you Giacomo for the question and then if I can go to the next one please.
Our next question is from Peter low Redburn. Please go ahead.
Hi, guys. Thanks for taking my question just one on one more on integrated gas clearly a very strong result is it.
Say to help us try and quantify the contribution from trading and optimization I guess, what I'm trying to gauge to what extent this was an exceptional quarter, thus as being within the range of normal volatility.
Expect within that business.
Any color around that would be very helpful. Thanks.
Okay. Thank you for that as well Peter do you want to say a word on that sure I would say Q4 was a very strong trading quarter.
Hum.
Exceptional in isolation, absolutely, but we tend to as I said before really is going to look at it across the south and so when you look at it across the 12 months our integrated gas.
As an entirety, so both the physical assets and the trading and optimization, partly have had a great radiant Fabulous and when you look at that of course trading optimization has played a key role in that but I wouldn't look at it from quarter to quarter as I say its much much better to look at it across the 12 months.
Great. Okay. Then can we go for the next question. Please.
So the final question is from Jason <unk>.
Allen. Please go ahead.
Yes.
Okay.
Hey, yeah. Thanks for squeezing me in.
My phone actually cut out.
Part of that question. So I may be asking the same question that was just asked and if so I apologize I actually have two the first one is on integrated gas.
There is clearly an elevated seasonality in the business as you've alluded to that seems kind of underappreciated by the market and I'm trying to understand how to quantify that and I guess I'll ask the question this way.
<unk> was very strong if we had a similar environment in <unk>.
Do you have any sense of how much different the earnings would have been can you give us an order of magnitude on that.
And then my second question is on the.
Jason We lost you.
Sorry, Jason we last year. When you started to talk about the second question can you could you repeat the second one.
So it's modeled the way it was kind of communicated was ad.
A lot of options and optimizing those electrons.
That value chain, which I would've guessed included this retail energy business.
If you decide to.
Move away from retail energy.
Europe and that removes one of the avenues to optimize those electrons does that change how you think about the return profile potential.
The renewable power business.
Okay. Thank you for that Jason I think I picked up the second one let me let.
Let me take a shot at both and build off of what you said there <unk> on the first one so.
Jason I think the way to reflect on this and what you might have mentioned earlier is the importance of looking at this across four quarters.
And what's important is that we typically have a portfolio that is geared towards the northern hemisphere winter. So we tried to go.
To try to go longer and the.
And the Q4 Q1 months.
And the way we do that typically is through supplementing our equity production with third party volumes.
So the best way to look at some of the underlying performance.
Just look at the volumes, we provide on a over the last two years and what you will see us quite some differences quarter to quarter in terms of that volume.
I think what's important to recognize is.
Theres different ways, we create value in the integrated gas value chain of course, there is at the asset side and you can see how much equity production. We're selling we then create a significant amount of value at the P&L side.
And then there's a small piece that is also opportunistic as we play.
My Best advice is just look across the different quarters look at the prices there and youll get a good sense of it. This is not about us trying to not be transparent but of course as <unk> also said earlier, our hedging the way we price manage our exposure is such that we look at it over an entire year and not simply quarter by.
We don't manage on a quarterly basis and Thats why you can see sometimes the disruptions on a quarterly basis as you did in Q3 doesn't mean the fundamental business is.
Is not is not strong it simply means that you have to look at it in a broader perspective.
<unk>.
On the on our decision Ryan shell energy retail and the broader value chain.
<unk> strategy continues to hold which is we believe we can create more value out of the green elektron than simply selling a green electron.
Through a PPA, we do that through a few ways one is.
We have a balance sheet and we have a trading organization that can take merchants risks measured merchants risks, maybe 20%, 30% and that allows us to be able to use that exposure to create incremental value beyond what.
A smaller operator can do we also have a huge b to b business.
Allows us to also cross sell.
On the current molecules, we're selling those businesses. We can also provide them green electron so that's another avenue.
Third Avenue is indeed, something like what we used to want to do with shell energy retail that works in other markets. It works for us in Australia. It works for us in the U S. At the moment. It is not working in the U K and that's more to do with the structural nature of the market. So this is not a.
Condemnation of B to C. It's more a fundamental issue in the structure of the market that we're currently operating in which is therefore necessitated this review that theres still ongoing without any firm decisions taken at this stage.
Super Jason Thank you for that.
I think we're done Andre.
No. We do have one more question and Mark will have a question from Alastair Syme Citi. Please go ahead.
Okay.
Okay, great. Thank you.
Well can you talk a little bit about the major energy acquisition.
Strategic rationale maybe framework to help us think about what branches.
And then.
Just a follow up I'm not sure.
Youre, making on upstream longevity.
I guess the question do you think.
You can or want to grow your upstream business and I'll say that across the combined <unk>.
Australia and <unk>.
Thank you.
Yes, thanks for that.
You want to start with nature and as you all talk about the upstream helping to 70, then thanks for that Alex I'm glad we might just if it fits in.
With respect to our niche LNG. So what do we see that it was just a very logical strategic fit when you look at the business that we have so we have just such a huge customer.
Based on his iPad, who have a strong need to decarbonize and of course, you see that with the convenience retail you see that with and aviation and stuff like that but you also see beyond that.
What we are seeing of course is that with that strategy. When we bought it is both cash accretive and earnings accretion as well. So those two things play out as it goes through it has a range of projects in the Hopper, which are coming up to both <unk> and the team is just set it up very well for growth.
We're going to be able to take the amazing capabilities that they have in terms of actually generating these projects and be able to link it into customers and create value in that sense.
So to the to.
The question around longevity.
We will go after the most attractive projects have come our way we don't have.
A specific restriction, where we're not going to go into order into gas clearly, we think we have more.
Gas opportunities at the moment, because we're able to add a lot of value. So yes, we are looking at.
At growing our production and gas and you can see it through our <unk>.
First on integrated gas for example, what we did last year.
On oil what we're looking to do is to have a much longer period of ability to be able to produce our oil profitably simply given where the world is we continue to believe that oil has a role to play.
A big part of what we announced a few years ago was how are we going to be able to move to actually pruned the portfolio to high grade what we have is an upstream business.
We have done a lot of that and therefore, what you see right now is a lot more strength and stability in that business and I'd like to extend that that strength and stability into the coming years.
Let me pause there and thank you Alister for the last question and thank you all for your questions and for joining the call.
Wishing you all a very pleasant end of the week and hope that you can join my team at our LNG outlook later this month as well as our annual ESG update in March. Thank you everyone.
Yeah.
[noise].