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Executives

Bruce L. Connery – Head of Investor Relations

Andrew Frederick James Gould – Non-Executive Chairman and Chief Executive Officer

Simon Lowth – Chief Financial Officer and Executive Director

Sami Iskander – Chief Operating Officer

Analysts

Oswald C. Clint – Sanford C. Bernstein Ltd.

Theepan Jothilingam – Nomura International Plc

Brendan M. Warn – Bank of Montreal

Anish Kapadia – Tudor, Pickering, Holt & Co. International LLP

Thomas Y. Adolff – Credit Suisse Securities Ltd.

Michael J. Alsford – Citigroup Global Markets Ltd.

Matthew J. Yates – Bank of America Merrill Lynch

Lydia R. Rainforth – Barclays Capital Securities Ltd.

Fred Lucas – JPMorgan Securities Plc

Martijn P. Rats – Morgan Stanley & Co.

Jon Rigby – UBS Ltd.

Peter Hutton – RBC Capital Markets

Michele della Vigna – Goldman Sachs International

Andrew Whittock – Liberum Capital Ltd.

Alejandro A. Demichelis – Exane BNP Paribas

Lucas O. Herrmann – Deutsche Bank AG

BG Group plc (OTCQX:BRGYY) Q1 2014 Earnings Conference Call May 1, 2014 7:00 AM ET

Bruce L. Connery

Good afternoon ladies and gentlemen, and welcome to BG Group’s First Quarter Results Conference Call. Our Interim Executive Chairman, Andrew Gould, and our Chief Financial Officer, Simon Lowth, will take you through the quarter’s key business and financial highlights, and will then answer your questions along with our Chief Operating Officer, Sami Iskander.

During the call, we’ll focus on Business Performance results as highlighted in our results statement. We’ll also be making various forward-looking statements. Factors that could cause our actual results to differ materially from the results we currently expect are set out in detail in the Principal Risks and Uncertainties section of our 2013 Annual Report and Accounts.

I will now turn over to Andrew.

Andrew Frederick James Gould

Good afternoon ladies and gentlemen. You will have seen our statement by now and Simon will take you through the key financial data shortly. Before I run through the quarter’s highlights, I would like to say a few words about my priorities for the company as its interim Executive Chairman. I want to reiterate that our strategy remains unchanged and we must accelerate the creation and delivery of longer-term value as well as delivering the Group’s plans.

In practice, this means a more assertive review of our options for active portfolio management and other development opportunities, ensuring the right partners and levels of equity. The Group is reviewing our operational, investment and portfolio management plans to facilitate this. One of my highest priorities is the recruitment of a new Chief Executive, and that process is now underway. In the meantime, when decisions need to be made, I will make them. We have a portfolio of high-quality assets and an exciting future, and I look forward to delivering the value that is inherent in these for our shareholders.

Turning to the first quarter, we continued to make good progress on both of our key growth projects, and we delivered both first quarter milestones, the second well for FPSO 2 in Brazil and Bongkot South Phase B in Thailand. However, in Egypt the situation remains difficult. Reservoir performance is deteriorating, and there continues to be a high level of diversions to the domestic market, where the Group is entitled to a lower share of production. While Phase 9a is on track to commence production in the third quarter of 2014, on plateau, it will only temporarily offset reservoir decline.

We did not lift any LNG cargoes from Egypt during Q1, and looking forward, beyond one export cargo expected in the second quarter, further BG Group liftings from Egyptian LNG will be very limited for the foreseeable future. In the absence of concerted action from the Egyptian government, the future commercial operation of Egyptian LNG is increasingly at risk. Our receivable balance rose to $1.4 billion, roughly half of which is overdue. We continue to have regular discussions with the Egyptian government.

In Australia, QCLNG remains on schedule for first LNG in the fourth quarter. In the upstream, drilling continues ahead of schedule. The Ruby Jo central processing plant started up, and we have completed four field compression stations and expect to complete the last two in the second quarter. At the LNG plant, the first storage tank has been tested, and we expect to start commissioning the gas turbine generators in the second quarter.

In Brazil, all four BSRs are in position and with additional wells connected, production continues to grow. By the end of the first quarter, gross production had exceeded 220,000 barrels of oil equivalent a day, up more than 50% from the first quarter of last year. Current gross production is around 235,000 barrels of oil equivalent a day and will increase as we connect more wells in the coming months. We continue to see excellent well productivity from the Santos Basin with new wells producing between 30 barrels of oil per day and 35 barrels of oil per day.

FPSO 2 at Sapinhoá is expected to reach plateau from only four wells around the middle of the year with plateau from FPSO 3 at Lula North-East by year end. FPSOs 4 and 5 are around 90% complete. The operator expects FPSO 4 to start in the third quarter and FPSO 5 by year end.

Let’s now turn to exploration. In Myanmar, we were awarded all four offshore blocks that we bid on, opening up another new basin. We sold a 25% interest in four of our 10 Barreirinhas Basin blocks in Brazil, and in Trinidad and Tobago, we acquired the remaining 25% interest in block 5(c) in the Greater Dolphin Area, which is an important long-term supply source for our LNG business.

Turning to LNG and our potential growth projects. The FERC application for the Lake Charles terminal was filed in March, while Prince Rupert in Canada received its final export license from the National Energy Board. In Tanzania, we signed a Heads of Agreement with the partners in Block 2, outlining how the companies will collaborate on development of a potential joint LNG project. And of course, construction continues at Sabine Pass, where the operator expects to have first LNG in late 2015.

I will now hand over to Simon, who will review our financial results.

Simon Lowth

Thank you, Andrew, and good day to all of you on the call. Let me now start with the financial results for the first quarter. Business Performance total operating profit was down 6% to $2.0 billion with both Upstream and LNG Shipping & Marketing operating profit down 7%. Net operating cash flow rose 6% to $2.4 billion, mainly as a result of favorable working capital movements.

Business performance earnings per share were 3% lower at $33.8 with a lower tax rate of 41%, partially offsetting the fall in operating profit. Total EPS was 9% down at $32.4 and this included an exceptional $62 million post-tax charge for restructuring costs.

I will now turn to the segment specific highlights. Total E&P production reduced by 4% to 633,000 barrels of oil equivalent per day. The contribution from our base assets fell 8% to 550 barrels of oil equivalent a day, driven primarily by reductions in Egypt and in the U.S. These declines were only partially offset by the ramp up of production from new developments, including Jasmine and Everest East in the UK and additional wells in Brazil.

Upstream operating profit fell 7% to $1.3 billion. Revenues increased to $154 million principally due to the higher proportion of oil in the portfolio and higher average realized gas prices. The increase in revenues was offset by higher E&P costs and exploration charges, and lower liquefaction profits from Egyptian LNG.

E&P costs rose by $226 million. This includes a $75 million increase in lifting costs, mainly due to new developments in Brazil and the ongoing asset integrity work in the UK. Royalties and other OpEx increased by $107 million, primarily as a result of the increased production from royalty-paying fields, whilst other E&P costs increased by $44 million. The DD&A charge remained flat, with the impact of higher unit rates associated with new developments being offset by lower volumes and lower charges in Egypt and in the USA following the impairments recognized in the fourth quarter of 2013.

Given lower volumes and the increases in absolute costs, unit E&P costs are higher, consistent with our guidance. On a unit margin basis, there was very little movement from a year ago – EBITDA was up slightly while EBIT was marginally lower.

Operating profit in LNG Shipping & Marketing fell 7% to $692 million. An 18% reduction in volumes were partly offset by lower losses from the Group’s historic LNG hedging program, which has now completed, and slightly higher average cargo margins. Overall, we delivered nine fewer cargoes, with this reduction principally from Egypt.

Our free cash flow in the first quarter, before disposal proceeds and dividend payments, was $153 million. Given the ongoing significant investment program, we expect to be free cash flow negative for the remainder of 2014.

In order to reduce the volatility of operating cash flows whilst we continue to execute this investment program the Group has entered into a series of commodity and exchange rate hedges. The Group has entered into Brent oil swaps at an average price of $106 per barrel covering the period April to December 2014. On a post-tax basis, these positions are expected to hedge more than 70% of the Group’s 2014 earnings sensitivity to oil price movements for the rest of the year.

Our foreign exchange positions cover approximately 50% and 60% of the expected sensitivity to the Group’s underlying cash flow to the Australian dollar and the Brazilian real exchange rates for the rest of the year.

Looking forward, the Group’s 2014 production guidance remains unchanged at 590,000 barrels of oil equivalent a day to 630,000 barrels of oil equivalent a day, although production is now expected to be at the lower end of this range given the issues in Egypt.

As we noted at Q4, we do expect strong seasonal phasing with second and third quarter volumes substantially lower due to planned shutdowns and maintenance activity, before rising again in the fourth quarter as maintenance is completed and new developments come onstream.

In the LNG Shipping & Marketing segment, in addition to the impact of very limited cargoes from Egyptian LNG, a planned gas development program in Equatorial Guinea will result in fewer cargoes in 2015 than in 2014. And with the change announced on Monday, we are reviewing our operational, investment and portfolio management plans and we will not provide 2015 guidance until we report full year results in February 2015.

And we are now happy to take your questions. Bruce?

Bruce L. Connery

Operator, before we begin Q&A, we’d like to ask if they would limit to two questions, and that way we can get to as many people in the queue as possible. Thank you.

Question-and-Answer Session

Operator

Thank you very much gentlemen. (Operator Instructions) Your first question comes from the line of Oswald Clint from Sanford Bernstein. Please go ahead, sir. Oswald Clint, your line is now open please go ahead.

Oswald C. Clint – Sanford C. Bernstein Ltd.

Hi, good afternoon. Thank you. First question, please, Andrew, just based on some of your comments at the beginning, in terms of the appropriate equity levels and acceleration of value. If we talk about Brazil, some of the previous Chief Executives have kind of spoken about Brazil needs to be free cash flow positive, potentially 2015, 2016, before such events might take place. Just given your comments at the beginning, has that view changed under your current leadership? And the second question is just on Egypt. You mentioned in the press release about $0.2 billion of kind of capital employed still remaining in respect to Egypt LNG. Can we take that as a worst case scenario in terms of a potential impairment, if we have to really think about writing off Egypt altogether? Thank you.

Andrew Frederick James Gould

Okay, so, look, I’m not going to comment on the specific situation in Brazil. The only comment I will make is that we are two to three years on from last time you got comments from the Chief Executive. And obviously, our knowledge of Brazil has considerably changed in that period of time. What I will say is it very clear for the Board of Directors, that nothing is sacrosanct; there are no secret cards. In reviewing our optionality, both for disposals, as for future developments, everything is on the table. The Board wishes to see options. Who's going to comment on – are you going to comment on the value of Egypt, Simon?

Simon Lowth

Sure, certainly. So Oswald on, in Egypt, we need to think about the carrying value of the business in two parts. You’re absolutely right that the value on the books of the ELNG business is $0.2 billion. And in a scenario where we saw continuing challenges with that part of the business then that would be the full extent of the exposure. The carrying value on the LNG business, clearly the remainder of the carrying value relates to the upstream business. And as we described back at Q4, we took an impairment then and painted a set of scenarios. But in common in all those scenarios was continued investment in Egypt. And clearly, face a situation where that comes under question, then we’d need to revisit the carrying value of the assets in the upstream.

Oswald C. Clint – Sanford C. Bernstein Ltd.

That’s great. Thank you very much.

Operator

Thank you. Your next question comes from the line of Theepan Jothilingam from Nomura. Please go ahead.

Theepan Jothilingam – Nomura International Plc

Yeah, thank you. Hi Andrew and Simon. A couple of questions, if I may. Firstly, just on – when you look at CapEx and you sit here today looking at the options for BG, in the past you’ve talked about sort of $8 billion to $10 billion of spend in the medium term. Could you sort of talk about where you’d prefer to be in that range, when you talk about optionality in the portfolio? Second question, just given your moves on hedging, perhaps you could give us some guidance on gearing on a best case basis for year end, please. Thank you.

Andrew Frederick James Gould

So, look, I don’t think we can, we’re in a position today to say where in that CapEx range we want to be, because the review of optionality that we might make on future developments depends on constructing partnerships. And finance is not the only consideration there. The size of project is a consideration, as is the type of project. So I don’t think today we can really narrow that range of CapEx any further than we’ve indicated in the past. Are you going to answer on hedging, Simon?

Simon Lowth

Yes, certainly. I mean we’ve set out, I think very clearly, that the rationale for the hedging program was to manage risk on operating cash flow. Why we can deliver the very significant capital investment program in 2014. I think you were then asking how that translated into the year-end gearing. All I’d say at this point, I’m not going to give you an explicit forecast where the year-end will be, that will depend upon the performance of the business within the range we’ve provided. What I can say is we saw gearing at the end of the quarter at 23.6. We’ve made it clear that we expect the remainder of the year to look free cash flow negative. So, clearly, we’re going to see some pressure upwards on gearing before the end of the year. But we’re obviously managing the business to maintain a strong and stable financial profile.

Theepan Jothilingam – Nomura International Plc

Okay.

Operator

Thank you. Your next question comes from the line of Brendan Warn from Bank of Montreal. Please go ahead, sir.

Brendan M. Warn – Bank of Montreal

Yes, thanks gentlemen. And thanks for the opportunity to ask some questions. It’s Brendan Warn from Bank of Montreal. Just two questions. Just firstly, obviously, with your what’s occurred Monday and your statements about acceleration equity levels and partners, can you just make a comment on where the – and then your discussions this week with your rating agencies. And I will refer back to your strategy you presented in May, and particularly slide 55, and that obviously we weren’t expecting acceleration of divestments until sort of 2015 to 2017 timeframe. And then just second question in terms of the staffing levels and internal capabilities. You look to be building operating Lake Charles, you’re in pre-FEED in Tanzania, and obviously you must be doing scoping studies in Prince Rupert. Can you just talk about internal capabilities in terms of the LNG operatorship developments, and just the stretch of capabilities, please?

Andrew Frederick James Gould

I'll let Sami comment on the detail of that. But specifically, if we talk about optionality and partnership, it is because we probably have no intention of operating all those projects, and choices need to be made. Sami?

Sami Iskander

Yes, I mean that’s absolutely right, Andrew. I think we obviously, as you know, have a very deep capability and capacity within the LNG lifecycle, early on operation – building operation, and so on; however, you refer to Tanzania, we’re doing the pre-FEEDs on behalf of the partnership in block 1 and block 2. But this is not an indication of future ownership. And if you put an aggregate, Lake Charles, which is, call it, LNG light, Tanzania, Prince Rupert, this is not an indication that we would be building or operating all three projects, going forward. And we make decisions on partnerships and equity, as Andrew indicated earlier on his comments.

Brendan M. Warn – Bank of Montreal

Okay, thanks. And in terms of credit rating, Andrew?

Andrew Frederick James Gould

Simon?

Simon Lowth

We’ve set out, I think very clearly, our policy to retain a strong single A. And while we have a program of significant capital investment during the course of 2014, and obviously we’ve taken steps to remove and reduce, I should say, volatility from cash flow this year. As we then move into 2015 and beyond, as we’ve said, we feel we’re past the CapEx peak we see our growth projects turning into sustainable sort of cash generating mode, and feel we then have absolutely the financial strength to support these metrics, while continuing to fund, the investment opportunities that we have.

Brendan M. Warn – Bank of Montreal

Okay. Thanks, Simon.

Simon Lowth

Okay.

Operator

Thank you. Your next question comes from the line of Anish Kapadia from TPH. Please go ahead.

Anish Kapadia – Tudor, Pickering, Holt & Co. International LLP

Good afternoon. I have a question about how you think about creating value in the current M&A environment. I was wondering whether it’s more about monetizing your more mature, non-core assets into what seems a very difficult buyer’s market out there at the moment, given the number of players looking to sell those types of assets?

Or would it be selling the higher quality assets, such as the Brazilian upstream, the Australian infrastructure, and then potentially recycling that cash back into development projects? And leading on from that, a second question. Looking forward to the 2016 to 2020 period, outside of Brazilian I see no significant growth projects. When you look at the base portfolio it looks like production could fall over 100,000 barrels per day of oil equivalent from those base assets. Just wondering, when you look forward to that time period, how much of a concern is that? And are acquisitions to plug that gap a priority? Thank you.

Andrew Frederick James Gould

I think it’s way too early to be discussing any options in that period. We have, it’s true, plenty of development options Brazilian which you are liking to realize themselves more towards the end of the decade And in terms of rationalizing the portfolio, or looking at portfolio options you are absolutely correct, that the M&A market is really a buyers market and I think that you going to assume for all players not just BG, selling mature-producing properties, particularly when they have attached liabilities, is going to be a very challenging. But on the other hand there is always a market for good assets and I think that we will bear all that in mind when we look at the optionality in our portfolio.

Operator

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

Thomas Y. Adolff – Credit Suisse Securities Ltd.

Good afternoon. Thanks for taking my questions. I just wanted to follow up on Anish’s question, but slightly – put slightly differently. When you think about your portfolio, and I’m talking about the portfolio excluding your non-operated stake in Brazil, and if you think about the portfolio considering the five variables, strategic fit, portfolio fit, capital intensity, decline rate, and cash margins, how would you rank your portfolio, ex-Brazil? To me, it feels like there's a lot of third and fourth tier assets in your portfolio. The second question is I just wanted to know whether there have been any management changes in Australia recently. Thank you.

Simon Lowth

So I mean quite obviously, you’ve outlined the criteria for ranking the portfolio and we will be applying, that as you indicate. And that will obviously affect decisions that we make, going forward. I don’t think we can disclose much more than that at this stage; it’s way too early. Management changes in Australia.

Andrew Frederick James Gould

Yes, we've a general manager which has change recently in Australia, which is a move that has been foreseen for a long – for at least a year. So there is no surprise in it. One gentlemen is retiring, and the man who is actually managing the project before has taken over as the general manager for Australia.

Thomas Y. Adolff – Credit Suisse Securities Ltd.

Okay. Thank you very much.

Operator

Thank you. Your next question comes from the line of Michael Alsford from Citi. Please go ahead.

Michael J. Alsford – Citigroup Global Markets Ltd.

Thank you. A couple of questions from me. Sorry, not on the good results, but a couple more on the management change. Can I maybe ask, was there a specific event that precipitated the Board to make the change now? You mentioned that it was due to the sort of speed at which the Company strategy was being implemented. But I guess the question I have is why now? Why not, maybe, after the profit warning in January? Why not wait until, I guess, you're closer to first gas in QCLNG? And then secondly, maybe can I ask Andrew, how do you want to be measured by the Board, and I guess by the market, in your time as Executive Chairman? Thanks.

Andrew Frederick James Gould

Well, let me ask the – answer the second part, first. The way I would like to be judged on the, what I hope, will be brief time that I’m interim – or Executive Chairman is firstly to keep the ship steady or steady the ship whichever way you wish to look at it; but secondly a more importantly to get the right Chief Executive Officer to carry BG forward. You’re other question excuse me.

Michael J. Alsford – Citigroup Global Markets Ltd.

It was more just around why the change now? Was there a specific event?

Andrew Frederick James Gould

I don’t think, I think we went through that thoroughly on Monday and I'm – we’re not prepared to really go back into it today. Chris chose to resign for personal reasons, and I wish to respect that.

Michael J. Alsford – Citigroup Global Markets Ltd.

Okay. And then let me just follow on then, sorry, Andrew. What are your key requirements, or the Board’s requirements, for a new CEO? What are the qualities or experience that you’re looking for?

Andrew Frederick James Gould

Well, I think that the future CEO, obviously, has to have an intermit knowledge of the upstream. He needs to be strategic and inspirational to take BG forward from a position where it’s no longer a pure exploration company, but a fully fledged E&P company. And he has to be able to understand the complexity of our LNG business, which is not simple, as well as the optionality that, that business is likely to present over the years to come and apart that not of course he has to be perfect.

Michael J. Alsford – Citigroup Global Markets Ltd.

Not too many of a criteria then? Okay, thank you very much.

Operator

Thank you. Your next question comes from the line of Matthew Yates from Bank of America Merrill Lynch. Please go ahead.

Matthew J. Yates – Bank of America Merrill Lynch

Hi, good afternoon. I’d like to ask a couple of follow-up questions on Egypt; the first maybe for Andrew. But as you've been through this experience, what has the Board learnt about having a significant amount of value concentrated in one country? And then if I heard correctly earlier, I believe Sami is on the call. There's been some press headlines about Egypt making a big receivable payment, perhaps, before the end of the quarter. Can you talk about if you've been involved in those discussions? And if so, what sort of magnitude may you expect to realize?

Andrew Frederick James Gould

So let me deal with – I think, firstly, that there is no specific lesson learned out of Egypt, all oil and gas companies have to measure the risk concentration that they have I mean those of us, are those of them of the community who involved in Russia must be having a pleasant time at the moment. I think that in BG’s case the Board is extremely conscious that we have high asset value in a limited number of jurisdictions. And it is something that we constantly review in function of a, the political, geopolitical and economic evolution of the places, where we do business. Sami would you like to answer.

Sami Iskander

Yes, I’ll try, Simon is looking at me. As Andrew said we have $1.4 billion of which $0.7 is outstanding so clearly a big area of concern with received assurances from the government around the payment of these arrears. And as you can imagine we have a very regular, extremely regular compact at all levels of government to ensure payment. I won’t comment on the announcements there are many that are made, but maybe draw your attention that in 2013 we collected over $1 billion from Egypt and clearly going forward every day literally we are trying to secure as much cash as we can.

Matthew J. Yates – Bank of America Merrill Lynch

All right, thanks very much.

Operator

Thank you. Your next question comes from the line of Lydia Rainforth from Barclays. Please go ahead.

Lydia R. Rainforth – Barclays Capital Securities Ltd.

Thanks and good afternoon gentlemen. Firstly, thank you very much for the additional disclosure that you’ve provided within your report; that was very, very helpful. And then secondly, on the questions, two, if I could. On Egypt, can you just clarify for me, if you don't do the investment in Phase 9b, how long do you think you can keep operations going in the country?

And then secondly, Andrew, if I can come back to the questions around accelerating value creation. What is the intended use of that cash in terms of to shareholders? Is it around an increase in the dividend? Is it around looking at share repurchase? I'm just looking at how your thinking of returning that value creation to shareholders. Thank you.

Sami Iskander

I can take the first one, I mean, currently in Egypt we produce about bcf a day. So it’s a fairly significant amount of production. So I don’t think we're in the how long can we maintain operations in the country, clearly operations are continuing. I think maybe your question is more around export. And really, with a stable investment environment, with a certain or significant, I would say sort of significant debt reduction and assurance on ongoing payments, there are a number of phases for West Delta Deep marine that are still outstanding; be it 9b, 9c, workovers third party gas near by discovered resources. So there is a number of activities that we would like to do. And I guess I'm coming to the punch, which is really all these very much depend on the Egyptian Government commitment on the repayment of our debt, and securitization of future invoices.

Andrew Frederick James Gould

So when it comes to accelerated value creation, I would like you to bear in mind that I've been very explicit that optionality doesn’t just concern selling down of existing properties, but also the possibilities we have to invest at various levels in new projects going forward. That being said we are very conscious that we have had very patient shareholders over a long period of time. And that should we realize large divestitures, which generate considerable cash, I will try not to annoy Simon by leaving the balance sheet too vulnerable. But I don’t think today that we are ready to say whether we would prefer dividend over share purchase or vice versa. I think that would depend very much on circumstance at the time as well as the amounts that we were taking about. Do you want to add to that, Simon.

Simon Lowth

No, that's absolutely right.

Lydia R. Rainforth – Barclays Capital Securities Ltd.

That's great. Thank you.

Operator

Thank you. Your next question comes from the line of Fred Lucas from JPMorgan. Please go ahead.

Fred Lucas – JPMorgan Securities Plc

Thank you, afternoon. One question for Simon; one for Andrew. Simon, the working capital in Q1 contracted, whereas normally it's a quarter where we see it expand. I just wonder what the explanations for that was, and whether this is part of a broader trend reversal in working capital for 2014. And my question to the Executive Chairman I mean if an aspirant, and potentially perfect, CEO asks you the question has the Board decided to accelerate this creation of long-term value, because there has been a tentative bid approach, how would you answer that?

Andrew Frederick James Gould

I would say that, I’m not going to comment on your question, Fred. Because we don’t comment on potential bid situations or whatever. Hypothetically, should a potential CEO ask me that question. I would assume that he was in a sufficiently confidential position to be able to telling the truth. But that is purely hypothetical what I’m saying.

Simon Lowth

Fred, your question on working capital you’re absolutely right; we benefited from a working capital inflow. And that does, indeed, contrast to Q1, 2013. This is principally down to receivables and more to do with timing and phasing than a systemic trend in the business and so it really related to timing, particularly of cargoes, but also some of the upstream, between quarters.

Fred Lucas – JPMorgan Securities Plc

Thank you.

Operator

Thank you. Your next question comes from the line of Martijn Rats from Morgan Stanley. Please go ahead.

Martijn P. Rats – Morgan Stanley & Co.

Yes, hi good afternoon. I had one question for Simon. Could you elaborate on the decision to take out these oil price and FX hedges? Is this a function of you now foreseeing a different path for the balance sheet? Or is this a function of sort of an unchanged path for the balance sheet, but a different change in sort of preference and risk appetite naturally coming from a new CFO?

Simon Lowth

No I think it’s consistent with the groups long-term policy which is while we don’t hedge commodity prices a matter of course from time-to-time, we may and indeed to understand how elected to hedge certain revenues, so 2014 we’ve hedged essentially eight months of exposure to oil price and the objective behind that, as I mentioned in my remarks earlier is that we have a significant capital investment program and important investment program, one that will drive value for us and we want to reduce the volatility of the operating cash flows we drive that program through and that help’s to further ensure the strength and robustness of the balance sheet. So it’s very much consistent with long-term policy execution in an eight month timeframe and it’s about risk management rather than taking a position on the oil price.

Martijn P. Rats – Morgan Stanley & Co.

Okay, thank you.

Operator

Thank you. Your next question comes from the line of Jon Rigby from UBS. Please go ahead.

Jon Rigby – UBS Ltd.

Thank you guys. Two questions. The first on – going back to the process of –and following on from the statement that you make about accelerated value realization, and also your search for a CEO. I guess I'm questioning, what is the timeframe in terms of how we can see that intention manifesting itself in terms of potential transactions? Will it have to wait for a CEO? Or will the Board conclude and start executing on that prior to a CEO coming on board? The second question is around your LNG portfolio. I seem to remember when the Egyptian cargos first started to decline you attempted to announce, I think, a sort of forced measure on the delivery, I think, to Chile at the time. Obviously, cargos are falling further. Are you examining the strategy that you previously had of not identifying where cargos are likely to go to long-term buyers, so that you can actually attach a source to an obligation? Thanks.

Andrew Frederick James Gould

So to deal with the second one, first, I don't think there's a fundamental change in our strategy. We, obviously evaluate the commitments in our supply against the variability the way that we can move that supply around. But I don’t think there is any fundamental change in our strategy that's been provoked by Egypt. Sami, do you want to comment on that.

Sami Iskander

No, there isn’t any change of strategy due to Egypt. And maybe I'll just add to the answer, we’ve taken care of the Egyptian situation through the guidance that we have given for 2014 profits for the LNG segment the $2.1 billion to $2.4 billion. So that said, it is our belief, our firm belief that the market will continue to be tight until the end of the decade and that our business model as it stands, our strategy as it stands, allows us to realize superior profits than may be some of our competitors. So that strategy will still stand.

It's probably important to highlight that 2015 will have lesser cargos due to Equatorial Guinea, where there's is a significant shutdown but we start to seeing growth again in the portfolio end of 2015 with Sabine Pass coming and obviously QCLNG at the end of 2014 onwards, so there is a little bit of tightness in our portfolio in 2014 and 2015 not a change of strategy and we start seeing growth towards the end of 2015.

Jon Rigby – UBS Ltd.

Okay.

Andrew Frederick James Gould

Look on whether or not we have to wait for new CEO I’ve been quite clear that should in the interim decisions need to be made, I will make them, the board will make them. So in the event that and it’s not I am not by any means saying it’s going to be an event but transaction should arise would require approval before we got a new CEO the Board will make the appropriate decision.

Jon Rigby – UBS Ltd.

Okay, thank you.

Operator

Thank you. Your next question comes from the line of Peter Hutton from RBC. Please go ahead.

Peter Hutton – RBC Capital Markets

Good afternoon. Can I just ask a couple of specifics? You've mentioned that you've hedged oil volumes at an average price of $106. Presumably, you've also hedged some – your gas production, or a proportion of that. Can you give an indication of the average hedge price at which you've hedged those volumes? And also, on Egypt, Q1 production was 66,000 barrels per day, down from 102,000 barrels per day in – in fourth quarter of last year. Was this just decline? Or was there also some exceptional maintenance in the first quarter, and we might see some at least offsetting production in the second?

Andrew Frederick James Gould

So, on the first we will, I think we disclosed what we will which is that we have hedged on a post-tax basis 70% of the groups earnings sensitivity to oil price movements and of course whereas some gases linked to oil price that builds into that overall portfolio of hedging Sami do you want...

Sami Iskander

So just maybe a little bit of – to elaborate a little bit on the numbers you have mentioned. I mean this is not just purely a pure reservoir decline. So there are three elements in play here one is obviously the underlying reservoir decline, secondly as we got into 2014 we have limited the amount of discretionary spend we do on workovers and whatnot really related to the situation on Egypt. And then lastly the entitlement under the domestic plc is less than the entitlement under the export plc.

So you’re seeing the effect of the diversion on gas and domestic markets giving us a lower entitlement. That said, there has not been any exceptional maintenance in the Egyptian assets in Q1, but what you will see towards Q3 is a start up of Phase 9a and as you recall Phase 9a is nine new additional wells that will come onstream. And as Andrew mentioned earlier on in the call, in his comments that will hold for a brief time for a number of months the decline we are saying.

Peter Hutton – RBC Capital Markets

Thank you.

Operator

Thank you. Your next question comes from the line of Michele della Vigna from Goldman Sachs. Please go ahead.

Michele della Vigna – Goldman Sachs International

Questions for Sami, if I may. On QCLNG, could you run us through the remaining key hurdles and risks in the coming months? Secondly, what have you learnt from the Sunbird-1 exploration well in Kenya?

Sami Iskander

So I mean as indicated in our release we made very good progress on QCLNG both in the upstream and in the midstream drilling and gathering I should say is progressing very, very well we have started our central processing plant in Ruby Jo, together with the field compression stations ahead a bit and there is a very, very progress in the midstream, Andrew spoke about hydro testing of our first tank and we will start the commissioning of our GTGs our gas turbine generators in Q2 and expect LNG in Q4 where are risks there are clearly some potential risks around the labor agreement that is out there we expected that is hand and we’re monitoring the progress but as you know this is going to be put to a vote to the unions on – tomorrow, actually on Friday.

But we believe that is very much in hand. We have overcome some labor shortages I mean there has been some talk about welder shortages but I think is an Island effect we don’t see welder shortages on QC. We’ve had shortages in instrument technicians working around loop checking but that again that is would address that with a contractor over the last few months that is behind us as well.

So, really, all I have to say that as I stand here today we have confidence in delivering our first LNG in Q4 as you can imagine this is a huge project and many moving parts but it is really all coming together quite nicely both in the upstream and in the midstream Sunbird, so we have drilled Sunbird, and there have been some – we have not announced we made an announcement we have discovered both gas and oil this well is under evaluation and when we have more to say about it we will report back.

Michele della Vigna – Goldman Sachs International

Thank you.

Operator

Thank you. Your next question comes from the line of Andrew Whittock from Liberum. Please go ahead.

Andrew Whittock – Liberum Capital Ltd.

Yes, good afternoon. Two questions, I guess. Just going back to guidance, in the past you've given us guidance for LNG EBIT, and 2014 CapEx. I just wondered if those – am I right in assuming the earlier guidance still stands. And secondly, Tanzania, I see you're running the pre-FEED study. Can you say what sort of scale of scheme you will be engineering up? Is it a two-train scheme, three-train, four-trains? So the enlarged group of partners.

Andrew Frederick James Gould

Sami, why don't you do that, and then we'll have Simon do the guidance.

Sami Iskander

So we’ve had significant progress in Tanzania, both upstream and in our discussions with our partners. We're leading the pre-FEED, we’re also working with together. So this is entire partnership block 2, block 134. We are doing significant progress on the site selection with the government. I've nothing to announce. We have nothing to announce today, but there is quite a lot of work there. However, saying that, I think it's, as pre-FEEDs as this is the little bit early for us to announce one, two, three, or four sizes for that. But as soon as, again, we do the work, we’ll come back to you.

Simon Lowth

Andrew, on guidance, yes, that’s absolute clarity, for 2014, we provided, in the E&P segment we provided volumes. And as we’d indicated we’ll be at the lower end of that range, given the issues in Egypt, we provided guidance on OpEx per barrel, and DD&A per barrel, and confirm again that we anticipate those being within those ranges for this year. EBIT on LNG, again despite being in that range and CapEx, we said that we expected capital for 2014 on a cash basis to be lower than 2013, which you recall was $11.2 billion and $11.3 billion and that remains the guidance for the year, Andrew.

Andrew Whittock – Liberum Capital Ltd.

That's very clear. Thanks, Simon.

Simon Lowth

Okay.

Operator

Thank you. Your next question comes from the line of Alejandro Demichelis from BNP Paribas. Please go ahead.

Alejandro A. Demichelis – Exane BNP Paribas

Yes, good afternoon, gentlemen. I guess it's a question for Andrew. Andrew, you have been talking about options several times now. In terms of understanding these options, are these options on partnerships mainly related to the asset level? Or can we start thinking about potentially splitting the Company, or even kind of a full takeover situation here?

Andrew Frederick James Gould

Well certainly – I'm not going to comment takeovers. No, I don’t think you should assume that it's necessarily at the asset level, at this point in time. It could be; but it could equally be partnerships in new developments going forwards. So I wouldn’t limit it just to assets, and I wouldn’t limit it just to selling down of the existing portfolio.

Alejandro A. Demichelis – Exane BNP Paribas

And as you look at these options on the table, making changes also to the LNG part of the business is that also an option?

Andrew Frederick James Gould

I don’t see at this point in time, any reason to change the way that we run LNG. Obviously, with the quantity of options that we have to supply gas, the overall profile of our LNG business is likely to change considerably over the next five years it’s likely to get much, much bigger. And, therefore, I think from a risk management point of view we will be carefully reviewing how the LNG supply balances out in the next five years.

Alejandro A. Demichelis – Exane BNP Paribas

That's great. Thank you.

Operator

Thank you. Your next question come from the line of Lucas Herrmann from Deutsche Bank. Please go ahead.

Lucas O. Herrmann – Deutsche Bank AG

Thanks very much, afternoon gentlemen, Andrew, perhaps the same question, in a different way, but one before. Firstly, I'm still struggling to understand why the change in urgency on realizing value. And secondly, is there any reason that we should not see the comments that you're making on portfolio management as effectively inviting offers for the entire BG business?

Andrew Frederick James Gould

That the BG business has been the subject to takeovers speculations, since its very inception. Is just sligltly bigger business and then it was in it’s inception. I don’t think you should take any remarks that we might make about optionality with our portfolio is anything more of an accelerating the strategy that we outlined in May 2013 and a willingness on the part of the board to accelerate some of the shareholder value that was held out as being an objective of that strategy at that time.

Lucas O. Herrmann – Deutsche Bank AG

Okay. And the change in urgency, Andrew? Is that just a function of the disappointments over the last 12 months and the increased cash pressure and balance sheet pressure that you find yourselves on now?

Andrew Frederick James Gould

Yes, I think there's a general feeling that we need to move, move forward I wouldn’t say is balance sheet pressure, I would say its delivering on us implementing this strategy.

Lucas O. Herrmann – Deutsche Bank AG

Okay, thank you.

Operator

Thank you. There are no more questions registered at this time. I’ll hand the conference back to you.

Andrew Frederick James Gould

Okay. Well, look, thank you all very much for calling into this conference call and your attention. And we will look forward to speaking to you again. The next public appearance will be at the AGM, on the 15 of May. Thank you very much.

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