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Royal Dutch Shell plc (NYSE:RDS.A)

Q1 2014 Earnings Conference Call

April 30, 2014 07:00 AM ET

Executives

Simon P. Henry – Chief Financial Officer and Executive Director

Analysts

Alejandro A. Demichelis – Exane Ltd.

Irene Himona – Société Générale SA

Theepan Jothilingam – Nomura International Plc

Lydia R. Rainforth – Barclays Capital Securities Ltd.

Fred Lucas – JPMorgan Securities Plc

Thomas Y. Adolff – Credit Suisse Securities Ltd.

Martijn P. Rats – Morgan Stanley & Co. International Plc

Iain S. Reid – BMO Capital Markets Ltd.

Jason S. Kenney – Banco Santander SA

Jon Rigby – UBS Ltd.

Michele della Vigna – Goldman Sachs International

Lucas O. Herrmann – Deutsche Bank AG

Peter Hutton – RBC Capital Markets

Operator

Welcome to the Royal Dutch Shell Q1 Results Announcement Call. There will be a presentation followed by Q&A session. (Operator Instructions).

I’d like to introduce your host, Mr. Simon Henry.

Simon P. Henry

Many thanks. Ladies and gentlemen, welcome to first quarter results call. Let me run you through our figures and some of the portfolio development, before taking your questions. And many thanks to the US joining early today, we are not planning a time slot like this every quarter. Please believe.

First of all the disclaimer statement, move onto our priorities, our long term strategy is sound, and we are working towards a successful implementation of that strategy. And the financial framework is clear and it is consistent. Our first quarter results reflect more robust levels of profitability.

However, as we saw in 2013, there is high volatility in the macro, and high volatility in our own quarterly results. So, not withstanding today’s results that is no complacency here. The priorities we set out for the start of this year have not changed. We are determined to improve our competitiveness, and we will balance growth with better returns. This means focusing on better financial performance, on enhanced capital efficiency which includes more selectivity on project choices, and that increase in the asset sales programme, and of course continuing strong project delivery.

We are repositioning the company for changes in the industry landscape, particularly in Oil Products and the North America shale plays. The impairments that we announce today, in Downstream, reflect our updated views on the outlook for refining margins, where there are substantial pressures on the industry. We are also taking hard choices across portfolio, with some $4.5 billion of asset sales announced in the quarter that included Wheatstone LNG in Australia are in Downstream exits from four countries.

Our investment strategy is delivering at the bottom line. The first quarter has seen new, profitable production from the deep-water Gulf, a ramp-up in Iraq, together with the new LNG from the acquisition of Repsol's portfolio. And we are maturing new options, with front end engineering and design or FEED decisions on deep-water and in the LNG business. And this is part of the project flow that will continue to drive further financial growth from us for many years to come. And of course the dividend increase we announced today for the first quarter, and 4% higher, that underscores our delivery in recent years but also the future potential.

Turning to the results, and I’ll start with the macro. If you look at the picture compared to the first quarter of 2013, the Brent crude prices were some $4 per barrel lower and we saw narrower differentials between Brent in the North America markers. Our liquids realizations declined from the first quarter last year, but we saw an increase in the gas realizations. The North America winter was especially cold, with milder conditions year on year in Europe, and we saw that both in the gas pricing and the volumes.

On the Downstream side, you might remember that a year ago refining margins were boosted by a number of industry capacity outages, and the aftermath of hurricane Sandy in the United States. This quarter, refining margins weakened in all regions, apart from an uptick on the Gulf Coast in the U.S., where the margins were lifted by the inventory draw-down and industry outages elsewhere. And chemicals margins declined in Europe also in the U.S., and that was due to weakening market conditions for intermediate products, but we saw increases in Asia where the industry cracker margins did improve.

Turning now to the earnings. Earnings for the quarter including a $2.9 billion identified item, predominantly in Downstream, and I will say more about that in a moment. But excluding those identified items, the underlying current cost of supply or CCS earnings were $7.3 billion for the quarter, a 2% decrease in earnings per share from the first quarter of 2013. Slight decline in Downstream earnings, broadly flat in the Upstream. Return on the average capital employed, on a reported basis all in was 6%, that included the impairments in the quarter, but it would be around 9% excluding all identified items. Cash flow generated from operations $14 billion, and that’s increases of 21% year-on-year.

Dividends main route to return cash to shareholders now declared more than $11 billion of dividends in the last 12 months, and at the same time executed more than $5 billion of buybacks. We have announced today the first quarter dividend will be $0.47 a share, that’s an increase of over 4% from year ago. The Scrip dividend uptake for the full quarter interim was 47% and we will be offering the scrip again for the first quarter 2014 dividend. I think you all aware the scrip shares issued are the A class. Buybacks will continue as part of the policy to offset dilution from that program, subject of course to the share price and the balance sheet. So far this year, we have repurchased more than $1.2 billion of B shares.

Due to Dutch withholding tax rules, buybacks are currently limited to the B shares, for economic reasons. The buyback did slowdown recently, due to the relatively high premium of B shares over A shares and we don’t want to issue low and buy high. We are still continuing to work hard on solutions that give us the flexibility to buyback both A and B shares according to attractiveness.

So looking at the moving parts in the results. Environmental factors such as the price of Downstream margins in aggregate a slight positive, some $300 million Q1 to Q1.

The security picture remains difficult in Nigeria, although this has improved from the very tough conditions a year ago, where you might remember the disruptions to gas supply to LNG, as well as the ongoing theft of crude oil. We saw a slight reduction in earnings from lower volumes, and cash and non-cash costs of about $500 million. It’s worth noting the last three quarters of the last year we saw the impact of a series of strong negatives in these choice of categories, that was a $2 billion impact for Q4 on Q4 for example, and that bottoming out now in this quarter.

Looking ahead into integrated gas business, the Upstream results included $3.3 billion of underlying earnings from this segment of the business, that’s LNG and GTL, this was a record result for this piece of business, and a 30% increase year-over-year balancing growth and returns. So let me be clear that there were some effects in this result that may not repeat, such as around $90 million of exchange rate gains, and $170 million of higher dividends from the Malaysian LNG venture, both on Q1 and Q1, and we also saw a strong LNG trading environment, that’s quite normal in the first quarter. However, over time, we are seeing the impact of a steady improvement in plant availability also.

This is also the first quarter where we consolidated the LNG portfolio that we acquired from Repsol at the end of 2013. All of that helped drive the strong first quarter earnings and cash flow shown on the slide, and Repsol alone adding a few hundreds of millions to earnings and CFFO in the quarter. We believe we are on track for up to $1 billion per year cash generation potential from that acquisition and that comes from the both base offtake, and also the enhanced trading opportunities that we achieved from combining the two portfolios Shell and Repsol.

Integrated Gas is profitable and is growing and we continue to be the leader among the IOCs in this business. Overall, the Upstream earnings, on an underlying basis, were $5.7 billion pretty much the same as the year ago. Earnings were supported by higher contributions from Integrated Gas also from trading, as well as higher gas realizations overall, which offset the lower oil prices, and the increased costs depreciation and exploration charges.

And we have given you the split of exploration charges on the chart here on the top right, and I hope you find that useful. You can see that in some quarters, the scale of exploration activity in Upstream Americas for example can dwarf the overall results. Americas results were in profit, compared with losses in the last several quarters. This in part reflects higher Henry Hub gas prices and better associated gas trading results in the cold snap.

Volume effects were neutral on a Q1 to Q1 basis in the Americas, and we are looking forward to continued ramp-up in the Gulf of Mexico later this year. Oil and gas production overall for the first quarter was 3.2 million barrels of oil equivalents a day, and that’s the headline decline of 9%. That is a large movement, but the earnings impact Q1 to Q1 was negligible, with much of the reduction in low margin barrels.

This figure in total includes 180,000 barrels oil equivalents a day of negative impacts for license expiries, including Abu Dhabi. Production-sharing contract effects, the year-on-year difference in Nigeria security, and also in the Netherlands the gas production reduction related to the earthquake mitigation.

Excluding all of the above effects, the production volumes declined by 4%. Production was impacted by warm weather in Europe and also by some 60,000 barrel oil equivalent per day of maintenance impacts and asset replacement, dominated by South East Asia, the Canadian oil sands and the Gulf of Mexico.

Looking forward into the second quarter, LNG sales volumes are expected to be higher, than the year ago driven by the volumes from the acquisition. The ADCO license in Abu Dhabi expired in January this year, dollar reduced our production by over 155,000 barrels a day going forward, but it is a low margin contract.

In the Upstream we are expecting continued impacts from the Nigerian operating environment, but you may recall we had particularly difficult gas constraints in the second quarter last year and we also saw the start of the blockade on the LNG plant itself. Compared to last year second quarter, we are expecting an off-set from lower maintenance activities, and increased exploration costs and a higher depreciation charges, all on a Q2 to Q2 basis a mix back of comparative movements.

We are working hard to improve our competitive position in Downstream. This business has generated 7% underlying return on capital in the last 12 months, we are driving here as we stated in March the $10 billion cash generation a year and 10% to 12% return on capital on a sustained three cycle basis.

As we indicated earlier, we’ve reviewed the balance sheet values for the Oil Products portfolio, and we have taken a $2.6 billion impairment charge today. This basically reflects an updated view on the industry landscape in refining in particular. We see continued pressure on margins from the growth of liquids rich shales in North America, from the stronger demand growth for diesel products ahead of them compared with growth for gasoline, and continuing significant overbuild in refining capacity, especially in Asia and the Middle East.

The impairment today represents about 14% of the total PTNE fixed assets in refining. We are continuing to refocus the Downstream portfolio, with divestments and non-core positions underway in four countries, out of the total of some 70 countries, and of course further reviews underway. Our earnings for the quarter, were excluding identified items, were $1.6 billion, marked by slightly lower results in both Oil Products and Chemicals.

The earnings were impacted by lower margins in refining, and lower trading results, and year ago Oil Products margins that were supported by industry outages which led to a positive refining and trading environment, that was relatively brief golden age and these effects have to a large extent reversed out this year. We also saw a positive Q to Q uplift for tax and exchange rates of some $200 million.

So overall, these are risk relatively resilient results from the Downstream, in a more quite a bit more difficult in industry environment. We did some uplift to the earnings from lower levels of unplanned downtime, and from higher retail and lubricants volumes. And our Motiva joint venture on the Gulf Coast in the US was in loss a year ago, and has returned to profit this quarter both due to better industry margins on the Gulf Coast but also improved operating performance.

Now looking back to the second quarter of 2014, we are expecting higher chemicals availability than second quarter last year, but lower refining availability, due to planned maintenance.

Turning now to cash flow and the balance sheet, our business strategy aims to grow cash flow on a sustainable basis to finance competitive dividends and investment for future growth. Cash flow for the quarter was $14 billion, the highest level for some years. We’ve generated $45 billion of cash inflows in the last 12 months, including some $2 billion of divestments.

Over the same period, cash outflows for CapEx and acquisitions were $42 billion, and that’s with a further $12 billion on dividends and buybacks.

The final tranche of the acquisition for Repsol’s LNG portfolio of $2 billion, was booked to capital investment in the first quarter 2014. Now gearing at the quarter end sat at 15.6% and that’s a slight reduction from the position at the end of last year.

And if you look at the chart here on the left, the free cash flow position is improving $3 billion on a four quarters rolling basis, defining free cash flow here on cash generation from operations less the cash used in investing activities, and that was $6 billion alone for the first quarter of 2014, comfortably paying for the dividends. This does reflects the uptick in CFFO, and the 2013 acquisitions beginning to roll out of the figures. All of this underscores the strategy is delivering results, and it underpins the increase in the dividend that we announced today.

And turning now to competitive performance. This chart shows the progression of the company on some of the key financial metrics, and where we sit versus the competition. As we said at our recent management day, targets can be useful in some circumstances, and we have taken the time out from precise outlook statements, and we think it’s important instance to look at the competitive position of the company. Many of you have asked and recently think how you can measure our progress. This chart shows the primary metrics to track our progress on growth, both cash generation from ops and the free cash flow; and also on returns, the return on capital employed.

Our CFFO development has been competitive in the sector, and this has been a major strategic objective for Shell in the last few years. The free cash flow, which is how we finance dividends over time, it has fallen recently as a result of more acquisitions and fewer divestments in 2013, but many in our sector have also seen falling free cash flow. On the first quarter 2014 basis, CFFO $14 billion, free cash flow $6 billion improving trends reached out the quarter rolling 12 months performance.

On return on average capital employed, on the left you can see reported returns all in accounting basis local for all competitors. This is the basis of long term remuneration, and it includes all factors such as impairments. While Shell’s returns have been trending down here, again this is common to the industry. But it is also important to look at returns excluding identified items, when we look at the competitive picture, so we don’t drive the wrong decisions or assessment by – and being driven by things like write downs or asset sales.

On this clean basis, well the accounting differences still remain between the Americans and European. Our return on capital is also low in the peer group, and we want to move nearer to the middle of that pack and be more competitive, that’s the aim. And we are clear that positive progress on these three metrics, turning the trends in the right direction, is our primary medium term financial objective. This is how you should judge our performance.

Now, let me update you on the portfolio activity. Another busy quarter. We’ve added new opportunities during the quarter, started up new production, and announced further asset sales. All parts of positioning the company for profitable future growth. And you can see the details on this chart by strategic theme. We completed the Repsol acquisition; we made new oil and gas discoveries in Asia Pacific, we added new exploration acreage in Namibia, or in Norway and Russia.

And we entered FEED on a series of new projects, particularly LNG and Canada, and the Appomatox deepwater hub in the Gulf of Mexico, and we also took FEED position on the Peterhead carbon capture and the storage project in the United Kingdom. These are some of the projects that could see the more substantial spending in the second half of this decade after we reach final investment decision.

Divestments continue in the non-core portfolio, with some $4.5 billion of deals announced so far this year, as we build up the asset sales for the more typical levels up to a slower pace in 2013. Integration of the acquisition is going very well, and we are ramping up new production in the Gulf of Mexico, Iraq and Malaysia. So just let me update you on two of these start-ups.

In Iraq, the Majnoon field, where Shell is the operator with a 45% that reached its first commercial production threshold of 175,000 barrels per day in the fourth quarter last year, and has been running at over 200,000 barrels per day in the first quarter excluding curtailments. Majnoon will only make a limited earnings contribution, but we do expect significant cash contribution from Majnoon from the second quarter 2014.

And in the Gulf of Mexico, production from Mars B, began on the 3rd of February, it averaged 3,000 barrels of oil equivalent for the quarter Shell – and is currently producing over 30,000 barrels of oil equivalent on a 100% basis that’s from two wells, the Mars B ramp up is progressing well then, and we should be at full production in a couple of years time.

Now let me sum up. Our first quarter 2014 results reflect more robust level of profitability. However, as it is an industry with high volatility, on the macro outlook does remain uncertain. The priorities we set out not changed. We are driving to grow our cash flow and improve our returns. This means delivering a better financial performance, enhancing our capital efficiency, and continuing strong project delivery. Our investment strategy is delivering at the bottom line. The first quarter two of that new production Gulf of Mexico Iraq, and new LNG from the acquisition. All part of a much broader project flow that will continue to drive further financial improvement from Shell.

The dividend increase today that underscores our delivery not just in recent years, but also the future potential, we distributed more than $11 billion in the last 12 months, completed $5.7 billion of share buy backs all underlying the commitment to shareholder returns.

So, with that, let’s take your questions, please and could we ask you to restrict yourself to one or two each, so that we can get everybody the opportunity, many thanks. Operator?

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) First question comes from Alejandro Demichelis from Exane .Please go ahead.

Alejandro A. Demichelis – Exane Ltd.

Yes, good afternoon and thanks for taking the question, just one question Simon, in terms of the performance obviously in the first quarter, maybe you can tell us how much you think of the improvement has come from some of the new initiatives or should we expect the new initiatives to further improve these kind of level of performance?

Simon P. Henry

Thanks, Alejandro and it’s a good question and no specific answer I’ll step back a bit, what we saw last year and it was very clear about in recent communication as that. When you brake down the portfolio and disaggregate there is some very strong performing parts of the portfolio, we saw integrate gas again today. Eagle has great potential as the growth comes through, not yet coming through just to be clear, but the projects are pretty much on track to do so.

The mature Upstream performs well, so there was couple of areas where we are very clear, we know we need to do to better. Improving returns in the first instance and creating a growth platform at least in the Shell potentially advance of the Downstream as well. So the Downstream and it was the unconventional results. And we also planned to deliver slightly lower exploration expenses by drilling slightly more successful exploration wells.

And we see on the later a better performance in the earnings contribution from the exploration that move to trend level. And so oil products, both oil products and shell these are long-term improvement programs. So yes there is some improvement, but we are only beginning a much longer journeys and Downstream overall in fact has a much more robust underlying performance this quarter and did a year ago, even though the results were down because actually they were funding margins are much more attractive a year ago.

What we have seen progressively over the last three years, really since (indiscernible) over the downstream some of the changes he made then only, but the organization the way we’ll look to manage the fuels value chain, some of those are coming through in a more, what we believe in sustainable way, and in fact we are a very long way from declaring victory because it needs a lot of people to do the right thing across the globe on a daily basis. And so, quite a bit more to come still several years to deliver there in the Downstream, but encouraging signs are not just in the first quarter, is really being now six to nine months of more robust underlying performance.

On the shale, the same is true, only in the terms of the bottom line definite improvement there from the gas pricing over $5 in the quarter. We have really focused to drilling only on the liquids still mainly in the exploration and reappraisal activity. So we had not yet ramping up our activity on the developments. Therefore, volumes are actually down to 30,000 barrels year-on-year and mostly gas, and we are seeing cost coming down from some of the changes that Marvin has been making.

So they have solid progress on the things we need to, but actually not that much contribution so far. I think by and large the answer to the underlying question of what’s made the difference in the first quarter, how sustainable is it. Well actually the portfolio is pretty strong overall anyway. We showed that when we deconstructed the portfolio. And sometimes you need also in this firing. I think most of them were in this quarter, and backend of last year we are unfortunate that was the not the case, this is not a portfolio that is in disaster or crises and it does need to work better in some places. Thank you for the question.

Alejandro A. Demichelis – Exane Ltd.

Okay, thank you.

Operator

Thank you. The next question comes from Irene Himona from Soc Gen. Please go ahead.

Irene Himona – Société Générale SA

Thank you good afternoon. Simon, it’s Irene, Soc Gen.

Simon P. Henry

Hi, Irene.

Irene Himona – Société Générale SA

I have two quick questions; firstly Downstream. You wrote off 14% of the value of European and Asian refineries. Can you say how the process works? Are you still reviewing the US side and is that to follow? And my second question on the cash flow in Q1. Excluding working capital, it increased about $1.58 billion, and that exactly corresponds to the $1.58 billion decline in the cash paid tax in the quarter which was substantially below the P&L charge. And that wasn't the case in previous quarters. Can you say whether cash taxes will sort of catch up over the rest of the year? Thank you.

Simon P. Henry

Thanks Irene. The process in a nutshell we spent quite sometime rather longer than we had originally reviewing the impact of those secular trends on our future projects refining margins, both at the global, regional and individual asset levels. The reason it’s taken time is that the trends are quite significant, and fundamentally Mogas versus diesel demand the emergence of significant liquids from the shale plays in North America, which are both light, but also feeding with some prices disconnects that U.S. refining system.

And then finally the fact that I’m afraid the Middle East and Asian countries continue to build massive refineries with highly competitive that low cost and damaging returns for everybody. So all of those three things are playing at overtime and there are quite some different ways depending on how competitors react, e.g, closing refineries or changing their positioning in the value chain. So we looked globally, regionally and at every single assets.

So we looked at the U.S., we looked at EU, we looked at Asia, we play out in different scenarios, we compare the potential future asset value and net present value terms against the book value. And this is the end result this is good as we can do out this current point in time, just reminder in fact we have a total asset base in refining is less than $20 billion before this write-down. And that is clearly, less than 10% of the capital employed in the group. So, important but not massive in group terms, I cannot say where we are going forward because all of the facts I talk about, they do continue to evolve over time.

There is no direct linkage between impairments and portfolio actions although clearly the economic analysis does have some barring on that efficient process. And cash flow in first quarter it’s all way challenging to look at only three months cash flow at partly the reasons you state, we do include the tax payment. Q1 is always a low tax payment year last year we didn’t make much profits by definition this year we will pay less tax than we did in the previous year.

Having said that, no I can’t make a forecast on three monthly basis going forward, but just remember Q2 and Q4 are both higher tax payment quarters Q1, Q3 usually lower tax payment, to be important number for us as the 12 month rolling with the uptick that you see there to $43 billion.

And just to point working capital overall $8 billion over the last nine quarters while the oil price haven’t really moved and is no access and that is much better management for inventory levels and underlying working capital. So that reflects some of the genuine structural improvements in the way we do business particularly in the Downstream and I certainly don’t include it from cash flow management and planning when looking at the financial framework.

Irene Himona – Société Générale SA

Thank you

Simon P. Henry

Many thanks, Irene. The next question.

Operator

Thank you. The next question comes from Theepan Jothilingam from Nomura International. Please go ahead.

Theepan Jothilingam – Nomura International Plc

Thank you, good afternoon Simon. Two questions, please. Firstly, just on Arrow LNG, I think you – in one of the slides you talked about divestment or project reframing. So I was just – if you could give an update there whether you’re considering perhaps using some of that gas as third party into other CBM projects? And then the second question is, could you just give an update also on where you are on the pet chems project in the US, please?

Simon P. Henry

Yes, thanks Theepan. Arrow LNG we frame it – describe it as reframing our divestment, we’ve been looking for opportunities to monetize the asset in a way that is less capital intensive and building a fourth LNG plant, and it is the best way to state that, which means potentially talking with all the other players in the region, how we get our gas to the market in the best way. We are currently working potentially with all three is to what is the best way to monetize, and the real priority is reframing of the development concept more than it is divestment, but I can’t say clearly than that – clearly an opportunities to contribute our molecules to other peoples infrastructure in a way that is mutually beneficial.

Chemicals in the United States, this really I think is a question about potentially investment in Pennsylvania based on ethane source from the Marcellus field. It is a – remains a potential project, we are doing some front-end engineering and design work, but it is not yet a final investment decision. So there is still quite a bit of work to do to ensure first of all the costs and then secondly the margins at both ends, the sales revenues and the cost of the ethane are sufficient to support over 20 plus year lifecycle to support an investment upfront, would be a non-trivial investment, multi billion dollars if we have to go ahead. So it’s quite well at times, but we are still someway from the final decision.

Theepan Jothilingam – Nomura International Plc

Do you think that's an event for this year, or does that roll into 2015?

Simon P. Henry

That’s difficult to say, Theepan. Let’s look at it this way. There is a verity of chemical opportunities open around the world some of which are fairly clear. So Qatar is one of them and using ethane as the gas liquids plants obviously Iraq as we develop the gas projects and all projects in Iraq there is also potential supply there in Iraq. And we have ongoing potential in parts of Asia around Singapore, and in the Nanhai complex in China. We can't do all of that at the same time clearly, but we are – it’s an attractive overall set of options to develop growth in the Downstream business. So we’ll say thank you Theepan.

Theepan Jothilingam – Nomura International Plc

Thank you.

Operator

Thank you, the next question comes from Lydia Rainforth from Barclays. Please go ahead.

Lydia R. Rainforth – Barclays Capital Securities Ltd.

Thanks, and good afternoon Simon. A couple of questions, if I could. The first one was just a very basic one on Cardamom and when you're expecting the startup for that one. And then the second one was on just something that you were quoted for saying on Bloomberg earlier about BG having some attractive assets. Could you just remind us what your criteria for acquisitions is at this stage within the restructuring of Shell?

Simon P. Henry

Thanks, Lydia. Cardamom is 100% relatively small but up to 50,000 barrel a day tie back in the Gulf of Mexico to the Auger platform. The work is all done on the platform. We are drilling the wells, we look to hook up and ramp up production. There won’t be a little bit of second half when it comes on. And depending on the pace of the ramp up which if it follows Mars B shift would be good. But they may not be a material contribution in 2014 it will contribute more significantly to 2015.

And acquisition of assets and interesting question bearing in mind its only three months ago since mostly the question were in the opposite direction. So perhaps we haven’t had enough discussion recently about the criteria internally. The criteria for acquisition they are saying, they are all for organic investment. We look at range of economic outcomes but also the sensitivities and risks and the strategic fit in particular across price range 70 to 110. We expect obviously positive NPV.

And we may – it depends on the assets we vary hurdle rates anyway in for organic, in the sense that certain assets provide infrastructure around which you will develop for many years they may attract a lower hurdle rate and then incremental assets the driving to existing pieces of infrastructure.

But same applies to M&A work but more generally we’re always interested in assets difficult to get too interested in companies and partly because of the price sensitivity high in part because you end up paying the premium for assets that are not the good strategic thing, and that really change that general statement today. Thanks for the question, Lydia.

Lydia R. Rainforth – Barclays Capital Securities Ltd.

Thank you.

Operator

Thank you. The next question comes from Fred Lucas from JPMorgan. Please go ahead.

Fred Lucas – JPMorgan Securities Plc

Hi, Simon, it’s Fred. A couple of questions. Good afternoon.

Simon P. Henry

Good afternoon.

Fred Lucas – JPMorgan Securities Plc

If prices hold at current levels, Simon, when do you anticipate Pearl will transition from cost recovery to profit sharing? And my second question. I note in the statement that a couple of hundred million dollars from the sale of your Mississippi line to Tapstone Energy. Is that right? So a couple of hundred million dollars for the entire 600,000 acre position that you had; around $300 an acre. Is that correct?

Simon P. Henry

And second point is correct, Pearl I have to say it remains confidential for obvious reasons. However, if you track back to previous charts from three, four years ago we just gave an outlook of 70, you have to subtract a couple of years almost by definition from the point at which reach cost recovery, so its doing extraordinarily well at the movement the same chart will note that you also don’t see a massive step down in returns on the first point of full cost recovery, so it will retain and remain a very strong return and cash generator for many years to come.

Fred Lucas – JPMorgan Securities Plc

Much appreciate it's confidential, but given how much higher prices have been versus that $70 reference, do you think it transits 2015, or is it later, 2016?

Simon P. Henry

I can’t really say Fred, and I’m not sure we make too much difference to the ultimate outcome particularly the $110 because there’s a significant amount of profit oil in there for us.

Fred Lucas – JPMorgan Securities Plc

Okay, thank you.

Simon P. Henry

Thanks.

Operator

Thank you. Your next question comes from Thomas Adolff from Credit Suisse. Please go ahead.

Thomas Y. Adolff – Credit Suisse Securities Ltd.

Hi, Simon.

Simon P. Henry

Hi, Thomas.

Thomas Y. Adolff – Credit Suisse Securities Ltd.

I have two questions, please; just one on Motiva. You said there’s been an improvement in the performance. My question I guess is how profitable is the JV now versus where you want to be? And have you seen the uplift from using different feed stocks already in the first quarter, or do you see significant more upside from this? I guess the second question is on asset disposal. Everyone is looking to sell assets. It’s a buyer’s market. Asset quality aside, for assets that maybe considered for sale or partial sale, how important is the partnership with Shell that could be offered to any partial asset monetization? Thank you.

Simon P. Henry

Hi, Thomas, have to think about the second question. Motiva, the improvement in performance really is all cylinders, better operational performance particularly in Port Arthur. That enables us to be both more selective about the crude and more able to maximize the flow of the molecules into and out of the refining network. We have bought cheaper crudes there and we are maximizing the effective marketing show that the Motiva have embedded. So in fact in the last six months it’s been back in profit. Is it profitable enough? And probably not yet, no. But it is cash flow – we would expect to see some countries in this year ahead of earlier expectation. The crudes flexibility, yes we are doing quite a bit of that, but not as much as we would like and this is essentially logistic constraint. You physically have to get the crude to the refineries, particularly in both Norco and in Port Arthur. So there is more to come, but that needs to be effectively better access to the pipelines and to some of the cheaper crudes that we need to get into Gulf Coast.

A buyers' market on the sales, it’s our first principle while that maybe true in general it’s not necessarily true specifically for the assets that we have been telling, for example the Australian Downstream, and the Nigerian onshore assets they have been quite significantly competitive, let’s put it that way. They’ve been – good prices achieved.

When it comes to partial deletion, where we are talking about strategic partners such as Chinese, or Russian, or Qatari friends, I think it’s quite important shale ability to operate, and the operational skills and capability that they look to bring as well is very important. Where we got lead down that is preference for us to do with somebody have much broader strategic relationship and there is a higher level of trust and understanding of each other.

It’s very difficult to say if you end up just purely in cash or economic driven transaction. How much value a buyer would associate with the shale operated asset. I would like to think quite significant, but I our real strategic priority and preference is to work with for example the Chinese, Russians, Qataris, Saudis, Brazilians with whom we have quite a good working relationship already.

Thomas Y. Adolff – Credit Suisse Securities Ltd.

Okay. Perfect. Thank you very much.

Operator

Thank you. The next question comes from Martijn Rats from Morgan Stanley. Please go ahead.

Martijn P. Rats – Morgan Stanley & Co. International Plc

Yes, hello. Simon, I wanted to ask you two things. The North Sea has seen a lot of maintenance last year, and it sounds like maintenance overall is coming down a little bit. Also, looking at the 20-F, the North Sea performance appeared reasonably weak last year, and I'm just wondering if we could perhaps be at a bit of a turning point for the North Sea. If you could comment on that. And secondly, I wanted to ask you, slightly taking away from the quarter per se, but if you look at all the annual reports that have been published lately, finding and development cost is continuing to trend upwards.

And at the same time, there seems to be much more focus on capital discipline in Shell and elsewhere. I was wondering if you had any view on where this relentless rise in F&D cost could go. Are we at a turning point for that one too? Or will this likely continue? If you have a view on that, that'd be much appreciated.

Simon P. Henry

Many thanks, Martijn. You maybe doing more study than I do, at least I’ll help try and give the questions justice. The North Sea maintenance it wasn’t just maintenance last year it’s general under liability on predictability or difficulty bringing assets back on stream.

We were at the low 50% availability relative to 100% capacity last year, just the industry only did 60% and that’s a quite a good reflection of the challenges of operating in difficult environment with mature assets. And obviously very high operational standards that we all need to meet there has been a little bit of turning point where I think we are above 50% in the first quarter, but it’s hard work.

And so there is not a major additional contribution yet, we’d hope that we will see continuing improvement quarter-by-quarter during this year, but we certainly look-forward to the big new projects Clair, Schiehallion, coming on stream and not the two distant future and they are both BP operator, so I can’t give any further details. But they look good projects and they will help the overall performance out of the North Sea.

The next question annual reports trend up with unit finding and development cost. I can honestly tell you I really don’t look at their further number it being an outcome from choices that we make decisions that quite often taken many years ago and it reflects so many factors that we don’t manage directly it’s not that helpful even as a long-term trend and the reason I think is pretty obvious in our own results we’re 9% down in production volumes for the same income year-on-year with pretty much the same oil price.

So volumes make your own statement on it but we pay the dividend with dollars not with barrels unit finding and development cost is also primarily relevant to what is your revenue per barrel, but if we keep bringing on Gulf of Mexico barrels to replace much lower margin barrels elsewhere, then I don’t mind paying a higher finding and development cost is not necessary reflection of inflation it can be a reflection of deliberate strategic choices, which I think in our case it is.

And on last point, I mentioned Iraq obviously Repsol quite a lot of the cost associated with these activities get reflected in certain ratios. But again no volumes it’s all revenue, all value but no volume. So rather less of an indicator going forward, so I am relatively relaxed on where it goes, as long as the projects are delivering as expected. Thanks Martijn. Next question.

Martijn P. Rats – Morgan Stanley & Co. International Plc

Alright, thanks.

Operator

Thank you. The next question comes from Iain Reid from Bank of Montreal. Please go ahead.

Iain S. Reid – BMO Capital Markets Ltd.

Hi, Simon.

Simon P. Henry

Hi, Iain.

Iain S. Reid – BMO Capital Markets Ltd.

A couple of questions, please; firstly on your North American shales, et cetera. Having taken this big write-down in the downstream, is there the intention to have a look again at your North American shale position and perhaps go for the same exercise? Particularly given the fact that you're selling some of these assets at what look like rock-bottom prices? And secondly on the scrip. I know you've answered this question before, but you talked about – and the buyback, actually.

You talked about the B share trading at a premium to the A share of 7%. It's been stubbornly at 7% now for some months and you’re kind of scaling back on the buyback because of that. It doesn’t look like that's going to change any time soon, and you've talked about the problems with the Dutch tax authorities. So isn't it perhaps time to give up on the scrip and kind of solve your problem that way?

Simon P. Henry

Thanks, Iain. And the first question on the U.S. shale, yes we’ll look again, we’ll be looking continuously and it is fair to say. But what we gave quite some granularity on I think in March is the different elements. We still have $24 billion, $25 billion on the balance sheet for shale, we’re reducing natural ongoing investment, while we evaluate certain of those basins further.

About two-thirds of that value within the Marcellus and the Groundbirch, both gas asset, one in Canada, one in the U.S., what we said before was the liquids asset that the remaining liquids asset by and large they look okay, and obviously still to be proven when we develop.

Appalachia and Groundbirch, it will depend on the pace of development. And also, in case of Marcellus, the quality of the asset is, we are still appraising that. The West Canada gas is a great resource. It is targeted at the LNG Canada project, having said that reversely the choice to go forward with that project may lead to lower investment if we reserve the molecules for LNG, which may actually trigger an impairment over time, because we’ll be investing less in the short-term. Those are the rules, we’ll see how that as we go forward. And that’s it’s not I wouldn’t realize any further impairment as we are still in the appraisal phase on the rest of the portfolio.

I think it’s fairly clearly flagged in the QRA as well. The scrip buyback, your comments are noted Iain. Thank you.

Iain S. Reid – BMO Capital Markets Ltd.

Okay. Thanks a lot.

Operator

Thank you. The next question comes from Jason Kenney from Santander. Please go ahead.

Jason S. Kenney – Banco Santander SA

Hi, Simon. How are you doing?

Simon P. Henry

All right, Jason. Good, thank you.

Jason S. Kenney – Banco Santander SA

Two questions, if I may. If I were to add the fourth quarter results and the one quarter results together to get an average of $5.1 billion, is that a good underlying estimate for average quarterly trend levels on a medium-term basis? Or do you think there will be headroom over that in a one to two-year timeframe under a similar oil macro condition?

And then the second question is a bit challenging, I suppose is just when is a material difference a material difference worth flagging to investors and analysts? Because in January, you pre-announced due to a 40% difference for actual results versus consensus, and today, you've got a 44% peak to versus market estimates but no pre-results comment; and still very limited guidance from your Investor Relations.

I am wondering how credible your guidance in quarterly statements is one month into each period when you've got a three-month period to talk about. I know you've commented on some of the two-quarter, second quarter operational trends, but how can you justify not putting in play at least full-period trading indicators like many of your peer group after the end of each quarter?

Simon P. Henry

Thanks, Jason. I understand some of the frustration that might be out there in terms of leveling an estimate. The – almost by definition the 5.1 average is precisely what you stated is a good average in the underlying performance, however more importantly, we need to improve returns and we will grow, that’s the strategy.

Therefore, it ought to do better over time, if we deliver the new projects. If we deliver the improvements in the old products business and if we continue to apply the activities across the shale portfolio including the upgrading the portfolio work, but those are the drivers of future performance, we expect growth and we expect better returns, so it should improve earnings of course comes with it.

The next question is probably not quite so easy to answer and then. Yes, we interestingly we did some discussion, but one clear point first it’s not difference between earnings and estimates that would drive any decision on disclosure. And because of that sorry guys, will give too much credence to the estimates and what reason that the underlying rationale for announcing early in January was twofolds. One it was a break from trend, and not just a quarterly trend it’s a 12 month rolling trend.

Because we have been at a $5 billion to $6 billion a quarter trend. We’ve had good quarters bad quarter not three consecutive quarters as we did in the back-end of the last year that were below that trend.

That was the primary driver, the secondary driver was we work in a regulatory environment, which is particularly to say intense at the movement. There are regulator out there looking literally for few headlines and we’re not going to put our name in them.

And the – we do you talked about very limited guidance from our Investor Relations team I hope that actually no guidance from the Investor Relations team because that basically is pretty much what the regulators expect. And stepping over that line is not something I am prepared to do. And you’d have to pick that one up with the regulators if you want more help. How credible is the pre-existing guidance? Well, clearly it can only be as good as it can be at this point in the quarter.

I do not know what will happen. Stuff does happen in our industry you know that well. Nigeria looked an ever green perhaps also turnarounds can take longer, starts ups it can be better and who knows, that we are trying to make enhancements through press release or otherwise for anything that genuinely is material.

Trading segment, most peoples trading segment just tell what margins were and prices were so you can apply that trading segments throughout performance, at the end of the day. But I am not sure that, that would actually help. There are always quite a few one off factors in any results. I mentioned DIA and the timing of dividends that differs in exchange timing of dividend payments.

It does happen and absent actually releasing the earnings on a monthly basis is very difficult to help you out while we have a portfolio subject to such a wide a range of external factors. So the most important thing is to look at the long-term trends, we are showing you the 12-month trend, that’s the operational performance that we hold people accountable, we need to pick up and all the big trends that I showed you moving in the right direction that equally important is the three to five year trends, where we have to meet the best return, the growth substantially through the cycle target that formed the basis of both the strategy and the financial framework. And sorry, is it not a lot more I can do in the current regulation environment for the three months period.

Jason S. Kenney – Banco Santander SA

Yes. But, Simon, you do come on quarter after quarter saying that you've got to look at the longer-term trends and not the shorter term trends, and then today you're saying that over the last nine months, you've got an $8 billion shift in working capital, and that's just…

Simon P. Henry

Nine quarters actually, that is the last two, three year not months.

Jason S. Kenney – Banco Santander SA

I mean that's due to better management. I mean this should have been in place three or four years ago. It was – to talk about things on a shorter-term basis and then tell us actually we've got to look at longer-term trends for quarterly results, it just seems a bit indifferent.

Simon P. Henry

Yes, now and I do appreciate it. I’m tempted to offer you a quote because this is how it feel sometime, this is why you must look longer, but if want to be an executive in this industry, if you meet with triumph and disaster and treat those in past as the same and you have to do that. It is not a disaster in Q4, it is not a triumph in Q1, the long-term trends are beginning to move in our favor, but that does reflect long-term strategic intent.

And yes, you can go back three, four years and say we should have been in a different position. Well, we weren’t. But that is good and it’s good in the sense that some of the improvements that we’re making come for free. We don’t have to invest to improve working capital or some of the improvements I talked about earlier in the downstream and you’ll see those delivered quarter-by-quarter in the success case.

Jason S. Kenney – Banco Santander SA

Okay. Much appreciated.

Simon P. Henry

Thanks, Jason. Good discussion by the way.

Operator

Thank you. The next question comes from Jon Rigby from UBS. Please go ahead.

Jon Rigby – UBS Ltd.

Yes, thank you. Sorry. I was just still taken aback by hearing Rudyard Kipling quoted on an oil and gas call. Can I ask two questions, one of which actually is related to Jason's question? If we had looked at Q1 last year, I think we could have got over excited and then got horribly disappointed by Q3 and Q4. Can you just maybe go back through again, and it's a question I've asked a number of times around sort of various trends that impact single quarters?

Are there things that we should be aware of that continue to affect Shell quarters that are positive in 1Q and perhaps 3Q, but less positive in 2Q and 4Q? And were those accentuated last year and won't recur this year? Or is likely to be underlying at a similar trend? Just so that we can start to consider where we are in your improvement; I take your point about looking at the long term.

Just one other question. Just on Nigeria, I know you're in the process of making some on-shore disposals, when you come to look at that, are you looking purely at the consideration being offered, or are you also having to be aware of sort of your legacy responsibility for those assets moving forward? Even though that you're not obviously the owner, you bear some sort of residual responsibility potentially. Thanks.

Simon P. Henry

Thanks. That’s a good point, Jon, that how can we help you better with this. And one thing is to say, it is a seasonal business somethings like tax payment, but also the gas business the volume demand is clearly higher in the winter in some parts of the world. And we do have quite a few other underlying issues; like some of the difference in exchange now is coming through from what the Australian to U.S. dollar on a quarterly basis is, $1 million to $200 million variance, which is becoming more predictable for us. And maybe we can help out there a little bit.

But fundamentally things like, timing a dividend payment, sometimes we're not in control of that. So there's a limit to what we can do I think year-on-year quarters as an easier comparison than consecutive quarters, for that seasonality reason. And I think we should try and take that first – that into account to help you. Sorry the second question, could you just repeat.

Jon Rigby – UBS Ltd.

Nigeria disposals. I was just wondering, because it looks to me that there's been quite a lot of bidders, but I guess that not all bidders are the same. Right?

Simon P. Henry

They are helping quite a lot of bidders. We have over 20 serious bidding; mostly consortium with the Nigerian operator, often with overseas financial or operational backing. And there are some good players in that who could do a good job with the asset. I think we could come to a good commercial agreement what as slightly more challenging; and slightly more difficult to predict is how we can actually get the overall approvals across the whole of the stakeholder environment including the government.

Because in previous transactions that has taken some time up to a year maybe and we’re also heading into a election in about a years time. And that can have an impact as well. And so difficult to predict outcomes but there are certainly some good player’s out there. Now it comes to sort of the ongoing liabilities the repetitional liability I think is impossible to divest.

And clearly there is the terms of the sale aims to established baseline against which we carry no further liability if there are environmental or other issues after the point of sale. Can that then hold up in the future, it remains to be seen. It will always be difficult to detach the Shell name from some of the activities in the Delta. And we have eyes open on this – but the legal protection will be solid and it is agreed and signed off as part of the deal. And that’s about as good as we can get. And if you're such a student of literature, Jon, you might try the next two lines of the poem as well. But I won't quote them.

Jon Rigby – UBS Ltd.

Thanks.

Simon P. Henry

Thanks. Take the next question please.

Operator

Thank you. The next question, please. Operator Michele della Vigna, Goldman Sachs. Please go ahead.

Michele della Vigna – Goldman Sachs International

Hi Simon. It’s Michele, thank you for taking my question. And one thing I wanted to ask about is the integrated gas division. So you had record results today, up $800 million year on year. And yet from the management day you had about a month ago, it looks like that is a division that you forecast to be down in terms of cash and returns by 2015/2016. Could you give us the moving parts there? Because it does actually seem from this quarter to be on an upward trajectory.

Simon P. Henry

Many thanks, it’s a good point, the reason where we are showing returns down a bit as by 2015, 2016 we still continuing to invest in Gorgon and Prelude and it won't have had much of an uptick. Well, it won’t have had any uptick in earnings in the earlier part of that period, so basically, the capital employed continues to grow there.

We also have license expired, and so effectively it’s a small movement down that was projected forward, so there is a license expiry in Malaysia that we are not projecting to get extended. And beyond 2015 and 2016 Gorgon, Prelude will make very significant contributions. So will Elba Island. But hopefully, we will continue to invest in new projects such as Canada or Browse.

So the basic point around the integrated gas positing in the March presentation was it is already highly profitable, it is already growing, and has grown fourfold in the past five years or so and we’ll continue to do so. It will be the core of Shell in the future and that’s basically is the message to take away, it may go up or down a little bit each year, but it will be very substantial part of Shell Group for decades to come.

Michele della Vigna – Goldman Sachs International

And, Simon, sorry, if I may come back to that license expiry in Malaysia. Could you quantify, in case it doesn't get renewed, when the impact would come and how much it really would be?

Simon P. Henry

It’s next year, it’s not that material in the big picture, but it would move as backwards while we’re investing heavily in Australia ahead of production as well. So it just moves us backwards and told this in the 20 F as well. So it’s an important contributor, but going forward there are bigger ones that will come on into replace it such as Gorgon, Prelude.

Michele della Vigna – Goldman Sachs International

Understood. Thank you.

Simon P. Henry

Thanks.

Operator

Thank you. The next question comes from Lucas Herrmann from Deutsche Bank. Please go ahead.

Lucas O. Herrmann – Deutsche Bank AG

Yes, Simon thanks very much. And I have to say, actually, reading back on your comments at Q1 in terms of the outlook, it's encouraging that you seem as poor at forecasting the quarter as we've evidently been, though don't for one moment take that as a comment that I'd like you to withdraw the commentary that you do give us to start with. Staying on the theme, I wondered if you could – is there any way you can bridge Q4 into Q1, and in particular in the upstream?

I mean you very kindly bridged Q1 on Q1. I struggled evidently to understand quite why your numbers were as poor as they were last year, and I'm not sure that I've ever really understood. But perhaps it's easier for you to tell us how it is that in the upstream you delivered something like $2.5 billion in Q4 2013 relative to the $5.7 billion in Q1 of this year. Clearly, I can see $700 million depreciation. I can assume $300 million from Repsol. I can take $300 million from gas prices. But I'm still $2 billion out. And the production numbers are essentially the same. I know not all barrels are equal.

Simon P. Henry

First of all we’re accurate in the operational statements we made; Lucas is you who derived the forecasting from them.

Lucas O. Herrmann – Deutsche Bank AG

No. I'll just remind you, Simon. You say now – you made negative comments, and you said now I say that all against the fact that I delivered – that I think we delivered over $7 billion of earnings a year ago in the first quarter. I take that as an intimation that first quarter in 2013 was actually very good. But it's an observation; and you're right, it's interpretation as well.

Simon P. Henry

Yes, couple of other bridges for you $500 million or so of exploration, which actually was much basically no tax shield in the fourth quarter, it’s still relatively high in the first quarter compared a year ago. The other bridge and this is a seasonal factor, so don’t take this the wrong way, but the trading activity in the first quarter is always higher than fourth. This is because markets are more volatile which may be because traders themselves are more active.

In neither quarter was there a particularly big difference from expectation. In fact this quarter in 2014 in certainly old products was lower than it was a year ago, but it was certainly better than it was in Q4. But for only the case was it particularly unexpected but there is that element to seasonality it seem to first quarter is always a good one. I am not sure if I go down the pub for the entire fourth quarter, but I mean the industry as a whole it just there is less trading opportunity in the fourth quarter typically.

Lucas O. Herrmann – Deutsche Bank AG

How big can that delta be?

Simon P. Henry

It can be several $100 million if you do quarter on - for Q4 versus Q1 several $100 million there was a particularly attractive GAAP trading environment in both Europe and particularly North America in this year. And much more volatility basically so there are more opportunity to work in that market compared to a year-ago. So the gas trading was up year-on-year the oil trading was down the year on year both of them are much better than Q4. So that both things that helped. And then basically the fact that the less tax shield, almost no tax shield on the exploration expenses in Q4, which I think we did flag at the time.

So exploration expense is quite a big contributor, the depreciation is one that does come through and takes a quite a bit of understanding even by us. So I will grant you that you, but there wasn’t changes on the discount rates or in the decommissioning and restoration so some effect, but that was more negative this year than it was last year. And the changes in unity neither, that you say as a result of proved reserve traditions at the end of 2013. All of which came out as we expect that may be done actually guiding a level of detail that would help me. But what you see now is more representative going forward, but the guys and all can help it to that one hopefully as not additional disclosure.

Lucas O. Herrmann – Deutsche Bank AG

And just one follow-on from that. If I go back to your fabulous comet charts at the strategy day where I guess the intimation was 2015 to 2016 the Company should be capable of delivering broadly $50 billion or so of operating cash flow, simplistically, looking at what you're now – you describe as a more typical quarter, Q1, if I annualized to today's cash flow, you're already there. Now I know there's a seasonal bias, but how does – in the context of – does anything we've seen today, or anything you've delivered today, should it give us much greater confidence around the implicit guidance and indications you've given for the 2015/2016 years via those particular charts?

Simon P. Henry

Yes. The confidence you should take would be Repsol LNG, from day one contributed excellent. The deepwater project all coming on stream they didn’t develop for is in cash terms in Q1 but they will, Majnoon also, same is true and I think structurally and there is some indication of downstream all product in particular in chemicals it remains very robust for all products, structurally improvement being sustained. Still some way to go and its too early to tell on the shale to be honest, but the strategic intent is of course to continue to grow the cash flow – the cash generation and the free cash flow. And I think we need – it was a good quarter, but we need two, three, four more quarters as the same, before we get near claiming victory. That message is directed as much internally as it is for you guys.

Lucas Herrmann – Deutsche Bank Research

Okay, final comment. It is good to see Shell delivering more what is should be capable of. That’s shall.

Simon P. Henry

Thank you. Good reflects on the underlying quality of the portfolio. Thanks Lucas. Move onto the next question.

Operator

Thank you. The next question comes from Peter Hutton from RBC. Please go ahead.

Peter Hutton – RBC Capital Markets

Good afternoon, thanks for the question. Moving away from the focus on Q1 versus Q4, etc., can I just take a step back on some of the longer term? And I think you are very clear in the reiteration that the key focus is the improvement in the ROCE, and of course, that can be done from two things. That's come from delivering improvements in profitability and also reducing the capital employed. How should we really be thinking in terms of balance of these drivers? When you're talking about balancing growth with returns, does that imply we should be thinking about half and half of -- the contribution coming from about half and half of those two drivers? That's the first question.

And the second one is on organic CapEx. What's the optionality around the $35 billion organic CapEx that you've guided for 2014? If you are getting stronger cash flows, and I know it's very early days, but theoretically, if those cash flows are coming through more strongly, how should we think of the direction of those incremental cash flows between return to shareholders and improving or increasing your organic CapEx?

Simon P. Henry

Good question. Peter I’ll come back to it when come back to that. Balance in growth and returns, you could get growth in the numerator and you can also improve returns by reducing the denominator. The capital employed is likely to continue to grow, I think we are investing at level much higher than our depreciation rates and we’re – fundamentally of divestment program is not going to be big enough to complete the reverse of that trend, it make it a bit sable for a period, but the improving returns have to come from growing the numerator of the earnings inline with the cash from operations. So that’s the primary driver.

$35 billion optionality well either up or down was probably limited optionality, there is uncertainty though from the 2014 program, the uncertainty is two fold, one actually quite difficult and very specifically identify spend and the date at which it gets spent in a full year projects. There is always movement over here and there are also investment dollars associated with some of the assets, we intend to divest and Australia both the downstream and (indiscernible) were a good examples of that. So, the timing of some divestment actually divest investment if that makes sense. And so our aim is $35 billion organic for the year, our current expectation is hopefully $35 billion for this year. The actual outcome could be a little bit more or a little bit less depending on timing effects.

The more important question, where is the prior of allocation of cash flow. I think Ben has been very clear and hopefully I reiterated also, until we demonstrate sustainable cash flows at the level with enable high level of investments that will be any high level of investment that’s far from clearly demonstrated we need not just for our end purposes, but with equity on that markets results to earn the license to invest and to deliver the strategy going forward, but we need to see further and more sustainable cash flow generation before we talk about anything beyond 35 which means the first priority on the additional cash flow obviously dividend it is managing the balance sheet always good to have a flexible balance sheet and if it’s a buyer market and it will be buybacks as and when we can do that in the economically efficient way.

Peter Hutton – RBC Capital Markets

Excellent, thanks a lot.

Simon P. Henry

Thanks Peter. We have one more question I think. Thank you.

Operator

(Operator Instructions) Okay thank you. We have no more questions please continue.

Simon P. Henry

Thank you, very much be in the good call thanks for joining the call particularly as I have friends from the U.S. an early start and also those of you who may participate between call as an awful lot of reporting happening over this week and the second quarter results we show that the release on 31 of July, 2014, we will back to Thursday for reporting today was only because the markets to close for May Day tomorrow in Europe. Ben and myself will be available to talk to you all and look forward to discussing further progress on that longer-term strategic delivery. Thank you very much.

Operator

Thank you. This concludes the conference call. Thank you for participating. You may now disconnect.

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