Earnings Call: Q4 2015

Feb 4, 2016

Welcome to the Royal Dutch Shell Q4 2015 and Full Year Results Announcement Call. There will be a presentation followed by a Q and A session. I would like to introduce your host, Mr. Ben van Beurden. Please go ahead, sir. Thank you very much, operator, and welcome to today's presentation, ladies and gentlemen. So you would have seen that we released our Q4 'fifteen results earlier in the year 20th January. We wanted to do that ahead of the shareholder vote on the BG transaction. And this morning, we've confirmed our 4th quarter results. But before we go there, let me highlight again the disclaimer statement to you. So again, our integrated business mix is helping to support our results in what is a quite challenging industry environment today. So we are putting on powerful financial levers to manage the company and the industry downturn. We are reducing costs and capital investment as we refocus the company and we respond to lower oil prices. For the combination of it BG, the completion of the transaction expected to take place on the 15th February will mark the start of a new chapter in Shell to rejuvenate the company and to aim to improve shareholder returns. The Shell is becoming a company that is more focused on its core strength, a company that is more resilient and competitive at all points in the oil price cycle that has a more predictable development pipeline. Let me first update you on our HSSC performance, because as you know the health and safety of our people and our neighbors and our environmental performance remain the top priorities for Shell. And I believe that we have the right safety culture in the company. Our track record is improving and is competitive. But also in 2015, we did regrettably have fatalities and other safety incidents. So we will continue with our safety drive, which is called Goal 0 to also further improve here. Shell's current cost of supply earnings for the year excluding identified items were US10.7 billion dollars And our results are of course lower with the lower oil and gas prices. But as I said, our business mix is also offsetting some of that and integrated gas and downstream delivering a strong performance. And the balance sheet gearing remained low at year end 2015 despite the downturn. We're pulling on powerful financial levers in the oil price downturn to maintain a strong balance sheet, to protect our ability to pay dividends and to keep a sensible and high value investment program underway for the future. And this is a substantial package of measures. And I think we have achieved a lot in 2015. We have identified major commitments to improve performance further over the next few years, including from the combination with BG as we get under the hood there, following expected completion on the 15th February. We've reduced our operating and capital cost by a combined $12,500,000,000 in 2015. Our operating costs fell by $4,000,000,000 in 2015 as our sustainable cost reduction programs get a pace and shelves costs should further reduce in 2016 by some $3,000,000,000 Now the capital investment side, we delivered 20.15 capital investment at around $29,000,000,000 and that's almost 25 percent or $8,500,000,000 reduction from the 2014 levels and more than 35% less than the recent peak in 2013. If I then look into 2016, we're expecting combined spending to be lower this year to be around $33,000,000,000 with options on the table to further reduce our spending again should conditions warrant that step. Impactful decisions on capital investments are driving the right outcomes here. Only the most competitive projects are going ahead, just 4 major investment decisions in 2015, of which 3 in the downstream, and many potential projects have been purposely delayed, rephased or canceled altogether. And this is to manage affordability and to get better value from the supply chain in this downturn. So you will have heard earlier this year that we have also halted work on the BAP sour gas project in Abu Dhabi. This simply didn't rank in our portfolio. And we are postponing the final investment decision on LNG Canada right to the end of this year and Bonga Southwest in Deepwater Nigeria to 2017. If I then turn to asset sales for 2014 2015 we have delivered over $20,000,000,000 of divestments and that exceeded our earlier $15,000,000,000 target that we set for that same period. And we have still further deals in the pipeline such as Showa Shell, Denmark Marketing and the sale of our shareholding in Shoja Refining Company in Malaysia. We are executing plans for a $30,000,000,000 divestment program for 2016 to 2018 as we consolidate BG in our portfolio. This will build over the next 3 year period and 2016 is likely to see asset sales below $10,000,000,000 The buyers are there, particularly in the downstream and some local gas markets and in more non traditional routes such as MLPs, private equity and some other oil and gas companies. Our MLP Shell Midstream Partners is set to deliver between 10% to 15% of the total disposal target that we've set over the 3 years. Then if I turn to project flow, which is an important element of improving our free cash flow position. There were of course relatively few startups from the Shaw portfolio in 2015, as we said earlier at the beginning of this year. At the same time though, it was good to see PG successfully starting up 2 LNG trains in Queensland and continuing to ramp up in non operated Brazil. And this resulted in around 16% volume growth for BG in 2015. And of course, underlines why we like that combination of BG and Shell. These BG growth projects will be a strong complementary fit to the Shell project flow, where we should see more fundamental growth in the 'sixteen to 'nineteen time frame as the next wave of large projects comes on stream. Restructuring in underperforming parts of the company is and will remain an important lever to improve our financial performance. There is more to come in the Downstream, but at the same time we've also achieved a lot there already. So we've delivered almost $10,000,000,000 of clean earnings, dollars 14,000,000,000 of cash from operations and over 20% return from the downstream in 2015. So compare that to 2,007 as you see in this chart that is an 18% increase in earnings from a 20% smaller portfolio in a broadly similar refining margin environment. And I think there's an important read through to the upstream here as we launch a more fundamental review of portfolio and capital allocation there going forward. So the B and G transaction is now close to completion, following widespread support from both Shell and BG shareholders at the shareholder meetings last week. As I said, the effective date is anticipated to be the 15th February and integration planning is well underway. We had meetings of the key management teams of both companies here in The Hague in the last few days. The chart here shows the key numbers and commitments around the BG deal. And really there is no change here. These commitments support all the statements made in the prospectus, which remain unchanged. We are planning that following completion 2016 will be the integration year as we drive these programs forward. And we'll update you on the progress in these areas in the future, and I'm really looking forward to that as well. Chart here shows the capital investment that we are planning for 2016 on a combined Shell and BGE basis. Now you may understand these allocations may change in the detail as we get more insight in the BGE portfolio of course. In downstream, we see growth prospects, particularly in chemicals. The conventional oil and gas portfolio spends areas such as the North Sea, Kazakhstan, Nigeria onshore, Southeast Asia, and we are reviewing all of this. Integrated gas and deepwater, which have been growth priorities for Shell in recent years, will reach significant scale with BGE positions included, really accelerating the delivery of the growth we had tied by there. And shales and heavy oil remain with long term potential, with reduced spending following restructuring programs in recent years. All of this means that with BG in the portfolio, we anticipate having more predictability in the company and a lot smarter sequencing of the project opportunity funnels in each of the themes. Now let me hand you over to Simon. Thanks, Ben. We gave our results in summary form on the 20th January and the figures here today confirm that update. There are no real changes. So you'll see a series of waterfall charts at the end of today's slide pack that give you some of the moving parts and I'll be delighted to take any questions on that later. In summary on the quarter, excluding identified items, Shell's current cost of supply or CCS earnings were $1,800,000,000 that's a 44% decrease in earnings per share from the Q4 of 2014. On a Q4 to Q4 basis, we saw significantly lower earnings in Upstream, similar earnings in the Downstream. Return on average capital employed was 4.8%, that's excluding identified items, and the cash flow from operations was over $5,000,000,000 Our dividend distributed for the Q4 of 20 15, similar to year ago levels, at $3,000,000,000 or $0.47 per share. Turning now to reserves. Our Securities and Exchange Commission, or SEC, approved reserves at the end of 2015 were 11,700,000,000 barrels of oil equivalent. That's a reduction of 1,400,000,000 barrels from the end of 2014. Falling oil prices have reduced Shell's reserves in 2015, a 47% decline in oil price that's the fall to $53 or so compared with 2014. That year average price effect was 1,700,000,000 barrels, although that did include 400,000,000 barrels for the de booking of Carmen Creek in Canada, which would not have survived on a price check. But in fact that project, of course, we subsequently canceled in 2015. There were some offsets to the negatives, and it was good to see that the impact of cost reduction programs elsewhere in Canada at the oil sands mining operation, where the actual cash operating costs have come down to $29 a barrel by the Q4 last year. Integrated gas earnings for 2015 were $5,200,000,000 that's a decrease of 50% because of the LNG prices track down in line with the oil price. However, global gas demand has been growing at 2.3% per annum over the last decade, and the LNG demand within that has grown at 8% per year. But LNG is still only 10% of the overall total gas demand. It's becoming clear that although the medium term outlook for LNG demand growth in China is robust, in the near term, the LNG demand growth is slowing there and potentially in some other countries, but it's really important to look at the development of the global LNG market overall. In recent years, both the LNG demand and supply have substantially diversified. Today, 30 importing and 20 exporting countries, up 30 different markets. And that's expected to grow to as many as 50 importing countries, 25 exporting by early next decade. Some highlights during the past year, during 2015, we did sign new LNG sales deals, at approximately 4,000,000 tonnes per annum, typically 10 years or longer contract length and linked to oil prices. We closed over 10 scheduled contractual price reviews across Asia Pacific joint ventures that reinforced traditional oil linkage levels of LNG contracts and simultaneously made progress at Shell in accessing new markets such as Myanmar, India, the Philippines, Jordan, Malta and Gibraltar. Turning now to the financial framework. I can't reiterate often enough that we plan the financial framework on a long term basis, multiyear, not for any given year or quarter. We aim to balance cash in and cash out across the cycle. And you can see on the chart here that, by and large, we're delivering on that strategy, 5 years, 3 years, 1 year. And the oil price breakeven point does, of course, move with the oil price because that links with the time lag to the industry costs. Our breakeven has fallen in the last year. You can see that here. We have options to further reduce that level, such as asset sales, capital spending, And there's no change to our guidance on dividend. Dollars 1.88 per share was declared for 20.15, and we confirm our intention to pay at least that amount, dollars 1.88 per share for 20.16. They will see enhanced financial disclosures from the company from the Q1 of 2016. In practice, the Q1 results will include 2 months of DG performance. Effective from the start of this year, we already have a new upstream organization that reflects recent changes in the portfolio and that's the platform for integration with DG. The organization, it will help speed up the streamlining of the portfolio following the closure of the deal. And we'll therefore report integrated gas earnings separately from Upstream rather than as a memo item and in more detail than in the past. In the Downstream, we will give earnings split to the combination of refining and trading, which we see as closely linked and the contribution from marketing separately. This should help investors understand the earnings drivers in the Downstream in more detail. Now let me also flag to you there are some indicators for the Q1 results in the announcement this morning and also in the backup slides in the pack today. So with that, let me hand you back to Ben. Okay. Thanks, Simon. So before we close, let's have a quick look on the competitive position. You know that we take a dashboard approach here and we are looking for more competitive performance on a range of metrics and over time, so not single point outcomes. You can see the trends here are downwards, tracking oil prices, and our aim is to be competitive across the price cycle. And we realize that there is still a lot to do here as well. So let's quickly sum up. First of all, we're putting on powerful financial levers to manage the company in the industry downturn. And Shell is becoming a company now that is more focused on its core strength, a company that is more resilient and competitive at all points in the oil price cycle, while having a more predictable development pipeline. And this will improve our shareholder returns. And with that, let's take your questions. So can I as usual, have just 1 or 2 of each, so that everyone has the opportunity to ask a question in the time remaining? And operator, can you please poll for questions? Thank you. We will now begin the question and answer We will now take our first question from Thomas Adolff of Credit Suisse. Please go ahead. Your line is open. Hi, guys. Two questions for me, please. 1 the first one for Simon, and I guess the second one as well. Simon, in your own words from earlier this year, you said Shell has been good at spending and not so good at earning and that changes on its way from within. So, I guess my question is, what is the size of the price for Shell standalone if you become less bureaucratic, more lean and efficient by say 2017 'eighteen? And I guess more linked to return and the return profile whether it could be as good as Exxon's? The second question I guess on CapEx, the €33,000,000,000 and you say further reduction if it warrants. And if it does, I wondered where it is coming from since I can't really see any FIDs being included really in that €33,000,000,000 and yet you're still spending about €10,000,000,000 more than Exxon? Thank you. Thanks, Thomas. I'll have a go, but Ben might want to comment on the second one. There's 2 separate on the first one, sorry, there are 2 separate questions really. The better at spending than earning, I'm not going to verify that quote. The point was it has been on occasion recognizing performance on spending or generating new opportunities more than operating. And that was a comment about internal culture, which is what your second point is about. The idea that Shell is bureaucratic relative to other players in the industry is an industry and we are more than capable of moving quickly, decisively and acting. And just as a proof point, exactly 12 months ago, we were accused of exactly that. I'm not getting to grips with the reality of the macro environment as we saw it since then. And we said we would do what we needed to do in that environment. Since then, we took $8,500,000,000 out of the capital relative to the previous year, dollars 4,000,000,000 out of the OpEx. By the way, we don't include energy cost in that. And I would challenge you to find any of our more agile, nimble competitors that got anywhere near that figure. And so the size of the prize, yes, it's material because what we took out was not slash and burn. It was, as we stated 12 months ago, sustainable. It was acceleration, if anything, of existing cost improvement, performance improvement and operational excellence improvement programs. That's why there's more to come this year, another $3,000,000,000 out of Shell. And let's see where we get to. In terms of return on capital, of course, we have to absorb the capital from the BG acquisition. And live with the life cycle effect of some of the balance sheet that we carry, for example, the $100,000,000,000 on Shell's balance sheet today, so $31,000,000,000 of cash, dollars 46,000,000 of assets under construction and $20,000,000,000 of exploration related assets. As that capital becomes productive, it will more than offset the impact of the BG capital. And yes, we would expect to move to a more competitive and long term sustainable position on return on capital. CapEx reductions below $33,000,000 Well, just reflecting where we've come from. In 2013, the pro form a Shell Plus BG was $58,000,000,000 In 2014, it was $47,000,000,000 and in 2015, it was 36,000,000 The 33 reflects our best estimate. But as we said last year, there are still some decisions to make as we go forward, both on large projects. And we've said today that Bongus Airways, LNG Canada, they are effectively pushed out into the future as new investment decisions. We've taken cost out in the supply chain. Last year. We expect to take more out this year. So there is potential, but our focus in the next 3, 4 months is safe, successful integration. Let's get after those synergies, and we'll update on what the CapEx looks like. And we won't do we'll take all the right decisions and move quickly where we need to on the CapEx between now and then and we'll update in the middle of the year. Thanks for that Simon. I can't think of anything to add to that first point. Okay. Can I have the next question please operator? Certainly. Our next question comes from Thiapan Dallingham of Nomura. Please go ahead. Yes. Hi. Good afternoon, gentlemen. Could you just remind us again how you think about the credit rating from here? Ham Houghton is the single A and what's the right balance then between protecting the balance sheet and the dividend? Thank you. Alan? Thanks, Deepan. The credit rating is important. We need to be able to continue business whether it's access to the Capital Markets or counterparty in the trading business. So it does matter. An A rating doesn't preclude us from either of those or more of the more general reputational importance when working with partners and government. It is, however, important that we do protect an investment grade rating and that we manage the balance sheet accordingly. We said quite a lot previously about the importance of the dividend and the cash the priorities for use of cash. And I have no changes to state today. So it's essentially the dividend comes first, and we need to address the effectively the gearing, the providers of capital on the balance sheet, the financing. And then the choice is between reinvestment and buybacks. And that is our stated approach and no changes. We expect post BG, the gearing will increase from around 14%, which is the lowest in the industry at the moment for the big players to low 20s. It's not clear exactly because we'll need to complete the accounting, but somewhere in the low 20%. And it is important, as I think I've made clear before, that thereafter, we do what we can to turn that number downwards again before we start to make other choices about allocation of capital. But the dividend is underwritten and the dividend policy remains it's underwritten for this year and the policy remains unchanged. Okay. Thanks, Stephen. Thanks, Simon. Can I have the next question, please? Certainly. Our next question comes from Jon Rigby of UBS. Yes. Thank you. So 2 related questions actually. I mean, you noted the high votes approving the deal on both sides, although I know there was a reasonable percentage that voted against on the shelf side. So given that you were very active in meeting institutional investors and dealing with the market through January in the run up to the vote, could you perhaps sort of talk about a little bit about where you felt there were misgivings and maybe how you're articulating the benefits of the deal or maybe where you needed to push further in persuading people that the deal worked and was good for you? And then sort of the second follow-up, as I understand it, I think it's been widely reported in the press, there was a get together of the senior executives from both sides of the company, I think, last weekend. And I just wondered whether there was anything, any impressions, anything you can talk about that came out of that vis a vis the combination going forward? Okay. Thanks, John. Let me take both of them. Indeed, we were very happy with the high vote on both sides. I thought 83% was a very strong endorsement in a shall we say very nervous market environment that we are operating in. I think in terms of misgivings as you call them, I think there is indeed concern about the oil price outlook. I think that was on people's minds and I think in general sort of nervousness and concern with where the market was going in that period. I think that's behind us now. I think we move forward. It's now for us to demonstrate that the majority of the shareholders for this were right and we will do that. The meeting that we had on Friday, Saturday, Sunday was a very good meeting. We had all the key country managers, top managers from both organizations in areas that are affected together in this preparation for day 1. I think the atmosphere was really good. It was one of let's make this happen. I was incredibly impressed with the quality of the preparations already, but also the enthusiasm and the excitedness of excitement of certainly the PG staff and the Shell staff equally matched going forward. We now have of course all the follow on work as we really make sure that we get ready for day 1 and all the practicalities on stakeholder management on day 1, detailed delivery of the value plans that we have set out that now need to be populated. And we are all looking forward to that day when we will as an executive team be spread out over key locations around the globe to celebrate together with our new colleagues the birth of the most exciting energy company in the world. So Simon and I were I think Simon and I were reflecting on it actually at the end of the weekend. Wouldn't it be great if you had a few of our investors, analysts and media commentators? I think it would have left a deep impression on all of you. Anyway, thanks, John. Operator, can we have the next question, please? Thank you. Our next question comes from Martin Ratz of Morgan Stanley. Yes, good afternoon. I wanted to ask you two things. First of all, can you talk a bit about the downstream, because towards the tail end of 2015 early 'sixteen now, we've seen a fair bit of weakness in all the mines coming through. And it's very difficult to understand to what extent and by how much that impacts the earnings throughout the downstream and particularly coming after such a strong year 2015. I was hoping you could provide some forward looking comments on that. The second thing I wanted to ask you goes back to this time last year when we also talked about CapEx and back then you indicated initially that your intention was to keep CapEx flat. And there was very much the impression or at least this is sort of my reading of the situation that a lot was locked in and that in a short period of time, you can't really do all that much. Yet if you then look at the actual amount of CapEx savings that have been realized this year are rather large. So clearly, it seems that there was some flexibility that emerged during the course of the year. It seems you didn't foresee in January. And I was wondering where that flexibility is and what at some point made you able to make the reductions in CapEx that in January 2015 still look more rigid, so to say? Okay. Thanks, Martin. I'll take the next word, the second one and Simon can talk in a bit more detail to the downstream point. I think sort of despite what Simon said in response to Thomas' first question, I do think we probably got the messaging wrong in January, right? So we've said that since. Indeed, we did give the impression that we were not going to move from a number and that we were basically in a wait and see mode. I think that impression was wrongly created, but certainly not the intention of the messages that we had because in reality what we said is it's not going to be more than 35 and we will manage it down to a level that we think is appropriate for the year. But we will not prematurely cancel all sorts of things and incur the regrets on day 1. We will make the decisions one decision at a time. And that's what we ended up doing. And of course a number of things happened during the year. First of all, we worked very hard on significant cost takeout. We ended up for just for the year reviewing 7,000 contracts in our contracting and procurement deposit, mostly focused of course on the upstream representing about 80% of the upstream project spend to see what we could gain there in terms of capital efficiencies. And we worked very, very hard on individual project options. Do that make sense? Can we postpone them? Can we maybe in some cases rework them as we started doing? And is this project as competitive as it can be given the falling oil price environment and the room that is opening up in the supply chain? And a lot of that is indeed sort of back to the agility that Simon mentioned. We were very, very keen to make sure we made the right decisions, one decision at a time rather than upfront regretting everything and then see what happens. And it showed indeed not only our ability to act, but I think it also shows how much flex there really is in the system if you want to live within your means, which is exactly what we of course set out to do. Remember the gearing didn't move at all in the 1st 3 quarters of the year and in the last quarter it edged up with 1.8 percentage points. Now we will be pretty much in the same game in 2016. Don't ask me exactly how that will go because again it will be one decision at a time. But generally it will be the same recipe. Whatever we can postpone, we will postpone and we will only go ahead with projects that are both affordable or it is use it or lose it and they are going to be competitive in the environment that we envisage. Now some of it is going to be a bit clear or rather unclear to see take the spend on BG. We don't know exactly what it is. We don't know exactly what sits in there. So we will have to wait for the 15th or 16th February before we start getting access to that. We have decent ideas so therefore we are okay to mention a $33,000,000,000 number at this stage. But what it really will be I'm afraid you will have to sort of wait for how the year plays out bearing in mind that we have at least 1 year of pretty good track record in this space. But let me hand over to Simon to talk a bit about the downstream, which will be an important part of next or this year as well. Many thanks Ben. And thanks for the question Martijn. The downstream had I think its best of the year in terms of underlying performance. It was aided by the, in fact, there's better refining margins than we've seen since maybe 2007, 2008 period. And towards the end of the year, the refining margins did come off a bit, although they have come back a bit at the beginning of January in this year. The actual impact for the quarter in margin terms is maybe only €100,000,000 plus. But the actual performance of Shell Refining and Chemicals for that matter was less good in the Q4 than it had been during the year. And we also had a higher level of planned turnaround activity, which I think we'd already flagged. It was partly because we deferred some from the earlier part of the year when margins are more attractive. So overall, we're probably a few 100,000,000 down in across refining and chemicals relative to where we have been earlier in the year for those two reasons. Marketing margins were also under a bit of pressure in the 4th quarter. But over the year as a whole, marketing activity sort of very strong performance, good new product introduction, deep down nitro, new lubricants, new markets. We're about £500,000,000 up on the year in the marketing performance year on year. So quite solid, sustainable performance improvements from downstream. Remember, around half of or maybe half of the more than half of the total downstream is not linked to that volatile refining margin is pretty solid predictable ratable income stream. Okay. Thanks, Simon. Thanks, Martin. Can I have the next question please, operator? We will now take our next question from Asit Sen of CLSA. Please go ahead. Thanks. Hello, everyone. So two questions, one on Brazil and a second on Nigeria, if I may. You have a small project in Brazil that's starting BC10 Phase III and then Libra is in the works for 2018 start. Could you talk about the current operating environment, how you see the outlook unfolding? So that's on Brazil. And second on Nigeria, surprised by the postponement of Bonga Southwest given the relative size of the project and your footprint in the region. Could you speak to relative cost structure in Nigeria and the current operating environment, please? Yes, okay. Thank you very much. I'll have the first go at both of them and perhaps Simon wants to add a few points as well. Yeah, Brazil is of course now becoming a key country for us, because it was always an important country, a country that we have operated in for 104 years. So we know it quite well. Indeed, BC10 and of course coming up Libra, very important projects and of course it will be significantly more with the addition of the BG position. So we do pay a lot of attention environment, what is happening in Brazil, not just the general macroeconomic environment, but also what is happening in terms of fiscal stability and other factors. And of course, we have been very, very close with the Brazilian government to understand what their intentions are to get assurances from them in areas where we needed them. And you will have seen in the media that quite a few of the plans that or plans the aspects that we talked about over the Christmas period have now also gone away. But Brazil will remain of course a key critical country for us. So we will continue to pay great attention to what is happening there. In terms of our partner Petrobras, yes, they go through a very difficult phase as well. But at the same time, they are technically competent player. They have been very clear in all the restructuring and reprioritization that they have done within their portfolio that the pre sold portfolio remains crucially important and that is also very clear within the government that that should be a priority in general. The entire industry is very clearly a priority for the executive branch because they realize that this is going to be a key element on which the economy will float. And therefore I think we are fundamentally still in a strong and advantage position, which doesn't mean that we should be complacent as we are never complacent in any of the big countries where we have significant positions. Nigeria, Bonga Southwest indeed fundamentally ought to be a good project. It has very strong fundamentals. It will operate in existing PSC. It is taking advantage of very strong organizational and other infrastructure that we have in country. But again, we need to get to a point that we believe not only is the project affordable, by the way affordable for both the government and for Shell, but also competitive. Bonga Southwest came back in its first presentation in the early part of 'fifteen when we saw a capital number which was sort of reminiscent of $100 oil. And we have to work that down to a level that is much more in line with the outlook that we currently have, the environment that we are seeing. And we are very clear between not only all PSC go at the expense of government revenue. So I don't think we are at that point at this point in time, but and therefore I think this will only materialize as a sort of rerun in 2017. But the fundamentals of the project in my mind as you rightly point out they remain strong. Okay. Operator, can I have the last question? Is there any further questions? We have no further questions at this time. But again, ladies and gentlemen, apologies. We will now take our next question from Alastair Syme of Citi. Please go ahead. Thank you. Hi, Ben and Simon. Can I clarify the mechanics of how you're going to put together the business plan ahead of the 7th June? I mean, I guess, you get to see the assets from the 15th February. You must do some sort of rerunning of business plans. And I guess there's a macro assumption, a long term planning assumption that will be implicit in that. And I know you're not disclosing specifics thoughts on the macro, but will you be using the same macro deck that you used for the business plan last summer? That one's probably for me, Alastair. It's a great question. Thank you. We obviously have put our plan together back in October, November. We actually have more than one price line in there in terms of what we can do, what we need to do. I happen to know that Fiji has done pretty much the same thing with relatively similar price lines. So we're both working on a one forward projection, which is quite similar as the baseline and both of us have and what would we do if the price turns out to be at a lower level. But legally and formally, we do not have access to the details of the BG planning information until the 15th February. So we don't actually get under the hood. So the best estimates that we can make pretty much the same as yourself and this probably goes for a few months is pro form a as the 2 companies reflect $1,000,000,000 of depreciation of the PPA, the purchase price premium that we are going to pay and we'll confirm that figure in the Q1 results, I expect, as we won't know that until we put the accounting systems together, but it's going to be about $1,000,000,000 a year. Take off some synergies and add on a bit of cost for one off activities associated with the integration, which is that the €1,000,000,000 and a little bit €1,200,000,000,000 not all incurred this year. The synergies €3,500,000,000 by 2018. We should deliver some of them this year, may not offset all of the one off costs this year, but we should be in a good position to have a net positive contribution in 2017 and obviously the full contribution in 2018. When we literally do as you say get together and at the weekend, the 3 days, quite a bit of it was spent doing this, the qualitative identification of opportunity, both precisely how and who is going to deliver the cost synergy from both sides of the fence, but also what are the value opportunities beyond the state of cost synergy. And that is something that we're looking to nail down at least in quantitative and to the maximum extent possible quantitative terms by the Capital Markets Day in June. Some of it will be directional by then, but that essentially is going to be the process going forward. Then of course, we put our plan together towards the end of the year. And that actually is a bit of a watershed moment. It will be the last time people are talking about Shell and BG. We will be one company by then. And it will give us as of 1st January 2017 one view of the future and one collective set of accountabilities for delivering it. And interestingly going into that process, we know what the outcome needs to be because we've already made the commitments externally on things like earnings per share, accretion, the financial framework, the divestments and where we expect to take the combined company in the coming years. So I hope that helps, Alistair, and also gives a bit of a feel for what you might see Q1, Q2. It's not going to be easy to predict or to estimate either for the listeners on the call or for us in the companies. Our focus is really on ensuring that we are able to report for the Q1 with a full level of integrity and that we operate the asset safely as of day 1. Okay. Thanks, Simon. Thanks, Alastair. I believe you have a few more questions. So operator, can we have the next question please? Certainly. Our next question comes from Lydia Rainforth of Barclays. Please go ahead. Thanks and good afternoon. A couple of questions, if I could. The first one just on OpEx and maybe over $3,000,000,000 cost savings target. Is it getting easier do you think to make those cost savings come through or as the organization is just getting used to work in a slightly different way? Or is it actually getting just more difficult given how much you've already taken out? And then the second one, just an accounting one, and Simon, I apologize, I should probably know the answer this already. But within the Q4 cash flow numbers, was there any particular cash impact from any of the restructuring charges that associated with the cost savings? Thank you. Thanks, Lydia. Let me take the first question and then maybe Simon wants to add his perspective to it and also talk about the second one. I think it's in a way it's probably getting easier. First of all, the number that we mentioned, the 4,000,000,000 cost takeout for last year is an all in number, it's a net number. At the end of the day, our cost have come down with it, of course, all the one offs, all the specials, all the redundancy costs, all the things that basically are the price you pay for taking cost out. Of course, some of it may also reoccur in 2016, but some of it also won't occur. So in terms of headline delivery that is sort of a bit of following wins that we have. But at the same time, yes, I think it's not just a matter that people are getting more practice at cost takeout. Believe me, we didn't discover the importance of cost takeout in 2015. We have been working on that of course for quite some time. But I do think as we still see a quite a challenging environment, I think people are more accustomed to challenging paradigms in the supply chain and are seeing more receptiveness on the supply chain as well. So I think that makes it easier. The fact that everybody is joined up and jointly committed to doing it because there is really no alternative. I think what gets also easier is to do more fundamental supply chain transformation. So how can we work together with some of our core suppliers, not by just putting more competitive pressure on them, but finding new ways of working, taking cost out through fundamental efficiencies across the interface that are going to be there for years to come also when the price goes the oil price and therefore inflationary pressures come back again. So I do think in that sense, yes, it is easier. And in that sense, in a way I also hope that we will have a period to complete all the things that we had in motion. And that is not because I'm afraid that short people will sort of lapse back into perceived old behavior. I think that's not the issue that we're talking about. There is just more capacity to do things differently in the industry if there is collective pressure on all of us. So yes, I therefore think the 3 is easily doable. And on top of it, bear in mind, we also have a tremendous productivity improvement that we can realize as a result of the combination with BG. In this sense, BG will do 2 things for us. It will give us the best of a benchmark that you can ever expect in the industry. This is not going to be some sort of benchmarking report that people say, well, there seems to be an opportunity for you here because somebody else somehow is able to do something better. We will be able to not only get these numbers, but we'll be able to work with the people to see what the different practices may be around. And I would fully expect that there are things that we can learn from DG as well as the other way around. So it is something else in terms of benchmarking. And on top of it, it's a great opportunity to look at productivity. Can we incorporate more operational activity without really increasing the supporting cost that we have, so economies of scale. So I think that 'sixteen will indeed see continued momentum in the same way that we have had in 'fifteen. Simon? So I wouldn't augment that particular answer too much. I agree it is getting easier. Eventually it gets harder, but for the moment there's a sweet spot because the $35 oil, nobody needs persuading what is the right thing to do. And the opportunity that comes with BG is another great catalyst to just get the organization to a better place. And as I say one day it will get harder, but good momentum in the system at the moment. Q4 cash impact of restructuring. Well, Q4 did include the cash impact of some rig cancellation associated with the Alaska program, which we provided for in the Q3 and we took in the 4th in cash terms where we effectively did end the contract. There are some fees, some deal associated spend, but not that significant. And there is severance that was associated with the 7,000 redundancies or fewer people that we've previously spoken about. But in total not that significant other than the rigs. And so most of the one off costs are to be incurred going forward. And there's always a one off or a phasing of tax payments as well, of course, in the 4th quarter. So that does impact somewhat on the 4th quarter cash flow. But overall, the 4th quarter cash flow and the annual cash flow showed good correlation with the earnings. So it's quite it's a solid underlying performance that we've seen on the cash, dollars 30,000,000,000 in. It gave us the $7,500,000,000 of free cash flow in the year once we take investments and divestments into account. Okay. Thanks, Simon. Thanks, Lilia. Operator, can I have the next question, please? Our next question comes from Biraj Bakharti of Royal Bank of Canada. Please go ahead. Hi, thanks for taking my questions. I have 2, if I may. The first one, just a Q4 specific one, you had a particularly strong quarter for the Integrated Gas business. And I know I gather there's some FX impacts in there, but I was wondering if you could give any color on the actual trading performance in the Q4 as one of your peers actually highlighted a particularly weak quarter in Q4. And then the second question was looking ahead to 2016 and the gearing numbers, you've mentioned a few times that lowtomid20s, gearing is about as far as you want to go. And I wonder if the disposal market is not as strong as you would like it to be, how far would you be willing to let that drift upwards if you're not getting the value that you want for the assets you want to sell? Thanks. Thanks, Biraj. Simon, can I hand over to you? Thanks, Biraj. Yes, in Australia, the deferred tax asset in Integrated Gas had a positive movement in the quarter, a couple of 100,000,000. Other than that, the gas business is a strong business. We have good long term contracts in place. Overall, for the year, the realized price in LNG was just under $8 compared to something over $13 a year earlier. And it's the mix in that marketing or the marketing mix that gives us the resilience and the diversity to be able to not only achieve good results in its tough environment in the IG, but also the platform to develop the new contracts that I talked about in the speech. The gearing low 20s, you're absolutely right. I mean, mid-20s is about as far as I might like it to go. Looking at the credit rating metrics themselves, we get stretched in the mid-20s, but also in terms of the flexibility on the cash flow and the opportunities that you could take mid-20s is probably as high as we feel comfortable. We do not intend to be giving assets away just to meet the gearing targets at all. Maybe Ben wants to pick up some of the philosophical and value driven elements of the divestment program. But the we need to make a balance taking all factors into account. The first point of call has to be reduce the OpEx. 2nd point of call, manage carefully the CapEx. Then the divestments, most likely focused in the first instance on downstream and then whatever other levers we can pull. So Ben is that and philosophically that's an important point. I think that there is a need to philosophy that we also laid out in the context of the deal. I think on the disposals, I think it is probably fair to say that the $30,000,000,000 that we talk about for the next 3 years is most likely going to be a little bit more back end loaded and the front end loaded. So I don't think this is going to be 10, 10, 10. It may well be a bit less than 10 in the 1st year. And definitely it will be more dominated by downstream, midstream assets in the beginning than in the end. But we do have a great handle on what sits in the 30 and we have the next 30 rating. And here we're talking just about Shell legacy assets only. And the first 10, 15 that we are focusing on by and large these assets that have very low sensitivity to the oil price and indeed have a very large downstream and midstream component in. So I do think we can execute that program over that 3 year period. Simon says there is every intention to have a full value for it. This is not a distress or fire sale and it's not the only legal we have. So I am indeed quite confident that the financial framework will stand that test over the next few years as well. Okay. Thanks, Biraj. Can I ask the operator if there is a next question? Our next question comes from Rayna Ramona of SGS. Please go ahead. Thank you. Good afternoon, gentlemen. On Slides 2930, you show the split of cost cutting between upstream and downstream. You show 1.7 percent upstream, 1.6 percent downstream. I presume these reconcile to the €4,000,000,000 overall reduction. But clearly, relative to the smaller size of the downstream business, it seems that the cost cutting was much more intense there. And I know that over the year, downstream free cash flow was around €7,000,000,000 Actually, it paid 80% of your cash dividend costs. So I had 2 related questions. Firstly, do you see this balance of costs between up and downstream changing after BG? Do you expect more of the $3,000,000,000 targeted cost cutting this year from the upstream? And then secondly, given those quite intense, obviously, downstream cost reductions, are you maintaining the targeted 10% to 12% sort of normalized return at mid cycle margins? Or you think the portfolio can actually do better than that, which is material in an environment of margin sort of coming off some pretty record levels last year? Thank you. Thanks, Irene. Let me just give you one clarification. The $3,000,000,000 that we talk about is legacy shell cost. We do not know in great detail of course what the cost structure and makeup and allocation is within the PG portfolio. So that will only come a little bit later. What we do of course know is that there is synergies between these two that can be added on top of that 3. But of course there will be quite a few moving parts because these synergies will also come with some one off charges. So it will be I'm afraid of course in this transition year a few puts and takes and we will try to explain it as best as we can as the year goes on. But 3 is the number that we talk to on the shelf side of the ledger. Simon, you want to talk a little bit more about these waterfalls that we haven't charged 2930? Sure. You're absolutely right, Irene, that the performance and this is a net performance, remember, in 2015 looks better in the downstream than the upstream. Remember this is all in. It includes a bit of FX and the FX was more of a contributor in downstream than the upstream, but also includes the one offs and the one offs were more heavily in the upstream than the downstream. So in terms of underlying improvements, it's about £3,000,000,000 like for like and that was in 2015 and that's the figure for 2016. In practice, it is loaded towards the upstream in 2016. And that's just about the phasing of the programs that I talked about earlier. A lot of good groundwork done in the Upstream in 2015, but it should start to make more of a difference and therefore proportionately higher contribution in 2016. And of course any synergies or other improvements in the BG combination would also appear in the Upstream. So in terms of performance improvement, the Upstream has the greater potential in that sense. And the 10% to 12%, I think we had a good year last year in year in Bainscape, I think that's fair to say. We saw better refining margins, but we've learned in the past you need to take advantage of those margins. And 2015, we did capture the margins and a little bit more following some of the changes we made or that Ben made actually to the way we manage the value chain in the downstream back in 2012, 2013. So that's a structural improvement. That was always intended to support the 10% expectation or in fact the $10,000,000,000 of cash flow from ops that the downstream is expected to make through cycle. No change at all to the strategic intent or the capability of the portfolio. I think what last year has taught you was a greater confidence in delivery in a more challenging environment because last year was relatively benign. We don't know what it was going to be today, but we're sure we're in a much better place to capture what margin is available in the market, not just in refining, but in the marketing businesses as well. If there is any update, is something else I think will come out later in the year. Yes. Okay. Thanks, Simon. Thanks, Irene. Operator, can I have the next question, please? Certainly. Our next question comes from Christopher Kuplitz of Bank of America Merrill Lynch. Yes, thank you. I'll keep it to just one question. Just wanted to ask whether there is a particular reason why you, in your presentation, Ben, dropped the reference to future ambitions regarding share buybacks. Just wanted to see where your head is on that topic at the moment and particularly how you're thinking about continuing with the scrip going forward, maybe linked to oil prices or not? Thank you. Thanks, Chris. Don't read anything in the fact that it wasn't on the slide. It is there. We will do it. There is quite a few other commitments and statements that we made in the original 2.7 and in the prospectus that we are not on that particular slide. The entire package of commitments and promises is still completely intact. Thank you. Okay. Operator, can I have the next question please? Our next question comes from Ian Reid of Macquarie. Please go ahead. Yes. Hi, gentlemen. Ben, just coming back on the previous question in terms of commitments, etcetera. I noticed on the dividend, you call that an intention rather than a commitment. And I wonder whether you're prepared to reiterate that even if oil prices remain at this sort of level, you still intend or commit better to pay a similar level of dividends say in 12 months' time as you're paying today? And on the second question, just interested on the start up dates you've got on your project, that slide there. As you've gone back, you're now showing us the 2018 plus project. It wasn't that long ago when you were telling us that 2016 was more likely start up then. Yes. Thanks, Ian. On dividend, really no change. No change in the commitments that we've made. We said we underwrite the dividend for 7 quarters in a row, dollars 1.88 for last year, at least that amount for this year. There is no change to that. And in terms of our overall dividend policy after this year, also no change to the dividend policy that we had before. So don't read anything in it. There is in that sense no change from the promises that we made as well as no change from the way we have approached the dividend in the past. We understand the importance of the dividend. We understand our own capacity to pay the dividend and therefore there is no change in whatever it is that we have said before. On Prelude, we always had material cash in 'eighteen and that is pretty much what we are saying today. So also there no real change. Okay. Thanks, Ian. Can I have the next question, please? Our next question comes from Gordon Gray of HSBC. Thanks. Good afternoon, gentlemen. It's a downstream question actually. You've been through a process of rationalizing part of your downstream business, pushing through capital efficiency. My question is, if I look at your slide on CapEx, it looks like in rough terms, you're planning to spend about $7,000,000,000 across the whole Downstream business, which is compares, I guess, to a long run history of more like £5,000,000,000 So maybe you can just let us know how much of that increase is maybe dependent on the FID in Pennsylvania and or what else is leading to what looks like an underlying increase in investment in the downstream? Yeah, thanks Gordon. It indeed it's the downstream typically has by and large its capital budget made up of sort of stay in business CapEx, so rather hard asset integrity type CapEx, turnaround that we capitalize, catalyst change that we capitalize and then of course a whole raft of small projects that are basically also there to sort of defend value. So it is continuing to invest in our retail network, is continuing to invest in our lubricant blending plants, refineries, chemical plants, so just basically stand still or to capture a little bit of value here and there by debottlenecking etcetera. If you add all that up and if you add on top of that a little bit of value growth you do indeed come to about €5,000,000,000 sometimes there is slightly bigger projects in there sort of like $80,000,000 $100,000,000 $200,000,000 projects, but by and large is made up of much smaller projects. Now we have and there are few opportunities to invest in very advantage projects. They are predominantly in petrochemicals. So you mentioned 1, the Pennsylvania cracker. There is another one we are working on which is the expansion of the non high complex in Guangdong. There is other opportunities that we have just taken FID on in the Gulf of Mexico, again on the basis of very strong advantage that we already enjoy also on a very strong foundation that we have built over the last years. And therefore you will see a little bit more sort of value growth in that portfolio going forward. Depending a little bit on what we will do with some of these projects that will indeed come up for investment decision, you will see a step up in spend in the downstream predominantly really in petrochemicals. Although there are a few strong refining projects that we have taken on as well. Earlier in 'fifteen, we took an investment decision on a hydrocracker bottlenecking in Scotford, a project that sort of blows the lights out in terms of their returns simply because again the advantage position that refinery has upgrading further synthetic crude. We are going to invest in furnace. Again, a modest investment in terms of absolute capital numbers, but it's going to significantly improve the crude flexibility because we are going to open up the operating window to take heavy crudes for heavy conversion. So very efficient investment and there will be more of these things that we are now confident to do because we know that we have brought asset base back to an asset base that is structurally sound and fundamentally advantaged provided indeed we put the investment in that to capture that advantage. So a little bit of growth in the downstream in my mind is the sensible thing to do And it also doesn't sit badly next to of course a major growth spurt that we will have taken in expanding our upstream capital with the BG acquisition. Okay. That's great. Thank you. Okay. Thanks, Gordon. Can I have the next question please? Our next question comes from Bert van Heuggenhoussel of Strobate. Please go ahead. Good afternoon, gentlemen. Two questions. First, your working capital has been reduced by 1 $600,000,000 And in view of the things you said about suppliers showing more receptiveness on the one hand. On the other hand, of course, some suppliers are maybe more or less on the brink of bankruptcy. So the ability to suffer more cost reductions is probably limited. In that respect, what do you expect further working capital reduction in the same bracket for the coming quarters? That's the first question. And the second question was, I was a little bit surprised by the number, the gas prices that you made in Asia. Does this mean that indeed contract prices are adapting much faster than previously thought to the lower oil prices? Okay. Thanks very much, Beth. Let me make a few comments on the first question and then ask Simon to complete it and take the next one. You're absolutely right that we need to be we need to take a long term view on how we deal with the supply chain. And so again, as I said earlier on, this is not a matter of taking our all our competitive weight in the current environment that we have and put more pressure on our suppliers because ultimately we suffer from that as well Either because it will quickly bounce back because it is temporal or more fundamentally we basically destroy capability that we all desperately need again when the oil price swings up and we will all be wanting to pursue a more aggressive growth path as an industry. So therefore the need to really work together with our supply chain partners to come with more structural solutions. Working capital reduction will remain an important focus, but it's not just working capital reduction looking at accounts payable and receivable. It's also working on stocks and there is still more we can do that particularly in the non trading area. There are still areas where we can bring inventory levels down in the supply chain by operating more efficiently. Simon referred earlier on to the fact that we have been changing the operating model in the downstream, but a lot of our working capital sits in oil and product stocks. Basically we take advantage of our trading capability to really optimize the supply chains and then on top of it we trade around the supply chains. There is more we can do to do that with a lower inventory level in general. But we have to be careful that we do not take out too much working capital because actually our trading model of course relies on making a return on working capital. So too much working capital reduction basically also takes the resource away to make money with. But in the main, I would expect there to be further areas for us to harvest working capital reductions also in 2016. Simon? To turn on the gas price movement, remember in the LNG market 85% of our sales are linked to long term contracts and within that probably around 70% is directly linked to oil or 70 of the 100. So there's a very close relationship with some time lag, sometimes 3 to 6 months time lag. And I think the prices have pretty much followed that route. Some of the realized prices that we report in the supplementary information actually are not linked to LNG, they are domestic gas prices. So they don't necessarily fall as far as the oil price has gone or in the same impact with the same phasing. So gas pricing is quite a mix over a period and is rather less sensitive overall than the oil production to price movements because of the different elements. I can't say too much more about that on specific prices other than that as we integrate PG, some of these dynamics will change and we'll need to be more helpful in terms of guiding as to what the impact of changes that you can see could be on the performance of the company. Thanks, Simon. Thanks, Beth. Operator, can I have the next question? Our final question comes from David Gambler of 2PH. Please go ahead. Thanks. Good afternoon. I have two questions, please. 1 on the downstream side of things. So looking at Q4 cash flow in the downstream, it was quite weak excluding working capital benefits, something that you just recently talked about. I'm just wondering if you could provide some color around if we stay at current refining and petchem margin levels, what is the cash flow expected in 2016 from chemicals and downstream? I appreciate we will get more visibility on this when you change your reporting structure, but if you could provide a bit of color on the 2016 development of the downstream cash flow. And on the CapEx side of things, could you break down out of the $33,000,000,000 how much is going into the upstream base spend? And what is your expected underlying managed decline rate taking into account BG? Thank you. Thank you, David. Simon, why don't you take them? Sure. Q4 cash flow, you generally don't need just look at the working cap, you need to put an adjustment in for the cost of sales adjustment as well for any short term period in terms of, if you like, cleaning up the difference between cash flow reported in the earnings. And I think the differential is maybe not so high if you look at it in that sense. The go forward, by and large, cash from ops tracks earnings in the Downstream other than working capital on the inventory. The total inventory for sake of argument is roughly 100,000,000 barrels that's impacted. And it's relatively easy, therefore, to use the average price in the last month of the quarter to approximate what the working capital impact on inventory is. So that may be helpful. Upstream CapEx, it's not a bright line cut off between asset integrity care and maintenance. The small project has been running around the $8,000,000,000 to $9,000,000,000 level. It's coming down, I think it's fair to say, over time, partly because the nature of the portfolio is changing, on average, becoming a less mature portfolio because we've been divesting assets or actually just decommissioning some of the older assets or taking the significant demand of that activity such as in the North Sea. The decline rate typically has been and we will always state, absent new investment 4% to 5% across the portfolio, but that varies. It can be 15% in deepwater. It can be close to 0 on an LNG project. As BG comes in, I reserve judgment until we actually have the numbers, but the key parts of that portfolio, if it's LNG, for example, in Australia, while you have to keep drilling, it's technically decline free. And in Brazil, many of the individual wells are almost decline free. So just at least in principle to be confirmed in practice, the BG portfolio is on average less mature and less decline than the Shell portfolio. So it should help our average decline rate. So I'd say we talk about 4% to 5% and practice has been closer to 4% recently. And one would hope that we'll see that reduce a little further as we go forward. It will also be helped by the nature of some of our own shell projects coming on stream such as Gorgon, Kashagan and the North Sea project, Clarence, Kallian, all of which are long life assets which help stem the decline rate. Okay. Thanks, Simon. David, thank you very much. And thank you all for your questions and indeed for joining the call today. So we'll have 1st quarter results. They are scheduled to be announced on the 4th May. And then as has been already mentioned a few times earlier in this call, we will have the Capital Markets Day on the 7th June as well. And then of course Simon and myself and other members of the executive team will be there and we're all be looking forward to talking to you by then. So thank you very much. Have a good day.