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Royal Dutch Shell Plc (NYSE:RDS.A)

Q3 2011 Earnings Call

October 27, 2011 9:30 am ET

Executives

Simon Henry - CFO

Analysts

Kim Fustier - Credit Suisse

Jon Rigby - UBS

Irene Himona - Societe Generale

Jason Gammel - Macquaire

Lucas Herrmann - Deutsche Bank

Iain Reid - Jefferies & Co

Mark Gilman - Benchmark Company

Oswald Clint - Sanford Bernstein

Alejandro Demichelis - Merrill Lynch

Jeff Dietert - Simmons & Company

Jason Kenney - Santander

Lucy Haskins - Barclays Capital

Operator

Welcome to the Royal Dutch Shell Q3 Results Announcement Call. There will be a presentation followed by a Q&A session. (Operator Instructions). I would like to introduce our host, Mr. Simon Henry. Please go ahead, sir.

Simon Henry

Thank you very much, operator. Welcome to the Royal Dutch Shell third quarter 2011 results presentation. I'll take you through the results and portfolio development for the quarter, and leave plenty of time for your questions. First, the usual cautionary statement.

We continue to make good progress with our strategy; improving our competitive performance and delivering growth for shareholders. Third quarter underlying earnings were $7 billion, earnings per share increased by 40% from third quarter 2010. With $1.8 billion of divestment in the quarter, we've already passed our $5 billion asset sales target for this year, with more to come. Our share buy-back program restarted in August, with $0.8 billion done in the third quarter.

Underlying oil & gas production increased by 2%, and that’s driven by continued progress in Qatar and Canada. We are maturing new projects for medium term growth with exploration success in French Guiana and Australia and launching new upstream development projects. So, we are making good progress against our targets, to deliver a more competitive performance from Shell.

Let me give you more details starting with the macro environment. If you look at the macro picture compared to the third quarter of 2010, oil and gas market prices have increased from year-ago levels although Henry Hub prices broadly similar.

The discount of WTI to Brent widened to $24 per barrel in the third quarter and that compares with less than $1 a year ago.

Our natural gas realizations increased from the second quarter in 2011, whereas the oil realizations declined sequentially. Industry refining margins diverged in the quarter with improved margins in the US West Coast, but declines in all the other regions. In Chemicals, industry margins increased from year-ago levels, especially in the US, although we did see a decline in the margins in Asia. We saw signs of a slow-down in demand at the end of the quarter in several of our downstream businesses.

Turning now to earnings: the CCS earnings, current cost of supplies, for the quarter including identified items were $7.2 billion. Excluding those identified items, the CCS earnings were $7.0 billion, and the earnings per share increased by 40%.

On a Q3 to Q3 basis we saw higher earnings in both Upstream and Downstream. Cash flow from operations was $11.6 billion and dividends in the quarter were $2.6 billion, of which $700 million was settled with new shares, under the scrip dividend program. We are offering that scrip dividend again for the third quarter.

We restarted our share buy-back program in August. This was at a time when financial markets were weak and it's a good time to buying back stock. This buy-back is part of our program to offset the dilution from scrip dividends, which have totaled $3.2 billion since we launched the scrip in 2010.

Now let me talk about the business performance in more detail. Firstly on Upstream: excluding identified items, Upstream earnings were $5.4 billion in the third quarter, and that’s an increase of 58% versus the same quarter in 2010. The earnings were driven by higher oil & gas prices, and a positive environment for LNG, liquefied natural gas trading. Our Upstream earnings were similar to the previous quarter, the second quarter of 2011, despite the $3.60 decline in Brent prices.

Natural gas and LNG were an important part of that good performance, where gas is priced primarily on lagging oil markers. Shell LNG business did very well in the quarter with growth in a good marketing environment. Our integrated gas earnings which is essentially the LNG business have more than doubled from year-ago levels.

The Headline oil and gas production for the third quarter was 3.0 million barrel oil equivalent per day, and that’s an increase of 2% excluding asset sales impacts. The LNG sales volumes grew by 12% Q3 to Q3, and that mainly reflecting the successful ramp-up in Qatargas 4.

Turning now to the Downstream: excluding their identified items, the Downstream earnings increased by 25% from year ago levels. They reached $1.8 billion in the quarter.

Our Oil Products results were similar to year-ago, with higher numbers from Chemicals. The Chemicals results were strong, lifted by higher margins in the US and in Europe, but although weaker margins in Asia. In Oil Products, the results were firm in a difficult industry environment. The earnings were similar to year-ago levels, despite asset sales in the interim and some unfavorable exchange rate movements in this quarter.

Chemicals availability, plant availability, decreased compared with the same quarter last year due to maintenance. Refinery availability though increased from year-ago better levels, and also compared to the second quarter 2011 when we had actually quite a major turn-around programs.

At the end of the third quarter, there was a fire at our Bukom refinery in Singapore. That did impact both refining and chemicals operations there. We are now in the process of restarting that facility, and we are looking into the causes of this incident (inaudible). We would expect to see around $150 million of net impact to earnings for this incident in the fourth quarter results. They will not be treated as an identified item.

Overall, we are expecting world-wide refinery availability for the current quarter, in the fourth quarter to be broadly similar to the fourth quarter 2010 levels although Chemicals will be slightly lower.

So those are the overall earnings. Turning to the cash flow. Cash generation on a rolling 12-month basis was $53 billion, that includes $11 billion of disposals proceeds. That against an environment with an average Brent oil price of $106 per barrel. Both the Upstream and Downstream business segments generated surplus cash flow after investment. And that gave a free cash flow position, which combined with a positive free cash flow position, which combined with our capital spending, dividend and buy-back programs, has resulted in a decline in the balance sheet gearing. Gearing at the end of the quarter sat at 10.8%, that compares with 12% at the end of the second quarter, and moving lower in our zero to 30% expected range. Of course, you would expect it in the strong oil price conditions that we've been seeing.

Divestment of non-core assets is an important element of Shell's capital efficiency and also our portfolio enhancement program. We've sold some $34 billion of assets in the last five years. That’s a roll-over in that period of around 20% from the total capital employed.

We completed $1.8 billion of asset sales in the quarter. These include the sale of Stanlow refinery in the UK, a non-core upstream assets in the Americas. We passed the target for $5 billion of asset sales that we set earlier year. There are further asset sales in the works, for example, our Downstream business in Africa, and gas pipelines in Norway. These should complete across the end of this year or early into 2012. Asset sales will continue, part of the overall strategy, however, the pace will probably slow down from here after what's been a very active period in the last couple of years.

Before we close, let me update you on progress with our growth portfolio in the quarter. We have more than 20 new project start-ups planned for 2011 to 2014, the four-year period. Now those projects will deliver some 800,000 barrel of oil equivalent per day of new production. These are the new projects which underpin our cash flow and production growth targets.

In Canada, the Athabasca Oil Sands Project, the first expansion, has ramped up, and should stabilize at its plateau rate in the near future. In Qatar, at Pearl gas to liquid (GTL), it's a similar story. Train 1 has now pretty much ramped up, and we are working to reach sustained plateau rates. Train 2 should start up, as planned, before the end of the year.

Our two growth projects in Qatar, Qatargas 4 and GTL, and Athabasca mine expansion in Canada, they added some 190,000 barrel of oil equivalent per day for Shell in the third quarter, and that compared with the total expected peak production from the three projects to some 400,000 barrel of oil equivalent per day. Still some way to go of course there. These start-ups reflect some of Shell's unique strengths in the energy industry today: innovative technology; integration across value chains; and creating long-life returns for shareholders.

We've also made progress with maturing new projects for medium term growth during the quarter. In Australia, the Arrow coal bed methane LNG project entered detailed design, what we call FEED, for an 8 million ton per annum, 2 train LNG project. Arrow has made an offer to acquire Bow Energy in Australia, with further gas resources in this play, which could increase the size of these LNG trains with more than 10%.

Elsewhere we announced two final investment decisions on two non-operated developments: the Clair phase 2 development in the UK, and the Wheatstone LNG in Australia. Together are expected to add around 40,000 barrel of oil equivalent per day for Shell at that peak production. We've also gone ahead with an innovative LNG scheme in Canada called Green Corridor. That will take onshore gas production into small scale LNG and that LNG will be used for fuel in the trucking industry on long distance routes.

On the exploration side, we had good progress in our frontier exploration portfolio. We had new acreage positions onshore in the Americas and in the Ukraine, and offshore in New Zealand and Tanzania. In our actual operations, we had a gas discovery offshore Australia and the Zaedyus oil discovery in French Guiana. So, good progress on growth portfolio.

Just let me summarize before we go for your questions. Our performance in the quarter underlines that we are delivering on our strategy. Third quarter underlying earnings $7.0 billion, earnings per share up 40%. We delivered higher year-over-year earnings in both Upstream and Downstream businesses. We've already passed our $5 billion asset sales target for this year, and there's more to come. We restarted share buy-backs in the quarter; this is all part of the capital discipline in the company. The new projects, they are coming on stream as planned, and we are maturing new investments for medium term growth. We are making good progress against our targets, to deliver a more competitive performance from Shell.

So with that, I'd like to take your questions. Please could we have you keep yourselves just to one or two so that everybody has the opportunity to ask a question. Many thanks for that. Operator, please could you now poll for questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions).

The first question comes from (inaudible) Nomura International. Please go ahead with your question.

Unidentified Analyst

Simon, two questions please. Firstly, just could you talk a little bit more about stock up cost particularly for Qatar, how you think they cut off draw up cost, I am trying so that I can get a feeling for the ramp up in cash flow over the next 12, 18 months please. Secondly, just on the portfolio, I guess the Woodside lock up and next month, if you could just remind us what your sort of position on Woodside is and how you see that going forward, that will be great, thank you.

Simon Henry

Hi, Stephen. The start up cost in Qatar and oilsands basically the start up cost already now behind us in oilsands. And in Qatar, LNG up and running now, there is still some costs particularly associated with the start up and ramp up of Train 2 in the GTL ahead of us. It is really only the order of few hundred million dollars still to go. Difficulty to separate how what has happened in the past form of future but overall there would be a net reduction as we go into next year, but it is only in the few hundred million and that’s pre-tax as well. I think perhaps fair to say that we are now cash positive and income positive in Qatar overall, which is good to see, and we should somewhere between $500 million and $1 billion on both income and cash generation in Qatar for the year as a whole, so building up nicely there.

Woodside, yes, you are correct now in the 12 months lock up period comes to an end in November. What we thought about this is still pretty much the case. The reason for selling down them in the first place was having developed a multiplicity of the project over which we have more direct influence and direct access to cash flow such as Gorgon and Prelude and then Arrow, Woodside become less of a strategic necessity or asset to the portfolio, and that it was probably a right thing to deal to monetize for right value for the shareholders. Now, we are not really in a hurry to do anything, we can take our time but essentially we would like over time recycle the value back into other parts of the portfolio. It does form part of the overall capital discipline process in the company but there's no particular urge to act quickly.

Operator

Thank you. And the next question comes from Kim Fustier from Credit Suisse. Please go ahead with your question.

Kim Fustier - Credit Suisse

Firstly on Alaska, I think the US CPA has recently used issued clean air permits. Could you just comment on where you stand at the drilling process and beyond these clean-air permits are there any other milestones that we need to watch out for? And secondly, just on the downstream, I think we saw a visible contribution from Raizen in your downstream earnings this quarter. Could you talk about the earnings power you expect from that JV in the medium term and the associated CapEx requirement? Thank you

Simon Henry

Thanks Kim. First, Alaska, yes, it was good to see that clean air permits were issued. We are now in permit exempts further than we have been before because that was unchartered territory. We have been working to a time table in terms of approval and various permits and we are pretty much keeping to the time table that would enable drilling up to three well next year. That could not begin before July. To do that, we need rigs available plus all of the associated activities which include over 30 support vessels of one kind or another. That is all in the process of being put in place so, logistically, we are getting ready and subject to getting ultimate approval we will be ready to drill from July next year.

The one thing that has been out of our control is there are already and no doubt, it will continue to be, once the legal challenges including the ninth circuit where we have been before. And we are not obviously in control other than the fact that we must prepare professionally and as well as possible in terms of meeting all the requirements to drill. So, everything in terms of permitting process is on track to drill next year, it is what you need to and we need to look closely at is the various legal process, and they are not under the control of the regulator.

And Raizen, just a reminder for those who don’t know Raízen became effectively operational in April this year, second quarter operation. This $12 billion joint venture Cosan, a Brazilian company 50-50, the world's largest sugar to ethanol producer, and also they own an operator just under 4,500 retail gas stations in Brazil, a fast growing market, over 20 % market share in the country.

In the third quarter, we did see a positive earnings contribution just under $200 million which is good to see. We expect generally to get a positive earnings contribution from Raízen. It’s operating in a market we know well in the downstream, and at the moment sugar and ethanol prices are unbelievably attractive. Both of them have to be a little bit volatile as we do expect some volatility in earnings coming from Raízen. But so far so good, up and running, great growth prospects.

CapEx, the growth prospects we acknowledge we are the biggest that we are only 8% of the market there in Brazil today, so great opportunity to grow there. You may recall the way we structured the transaction, we injected $1.6 billion of cash into the joint venture. That essentially is already covered by our CapEx even though we've not injected it all yet this year's CapEx. That CapEx from Shell injected into the venture will form the funding for Raízen own CapEx within the joint venture. So, certainly for the next two to three years we don’t expect to see any further Shell CapEx going in. Obviously, the longer you go, the more independent on two things; one is what level of growth they achieve and in fact as dividend stream that we see coming out of the company. So far so good.

We'll move to the next question, thanks.

Operator

Thank you, the next question comes from (inaudible) for Morgan Stanley. Please go ahead with your question.

Unidentified Analyst

Good afternoon, I wanted to ask few questions. First of all, can I ask you, can you update us on your thoughts on the dividends particularly with the cash flow so strong in the balance sheet, the gearing and also from an operational perspective, quite a bit of de-risking going on lately with several project start ups? And secondly I want to ask you about the under spend in terms of CapEx this year which seems to be coming little bit below what you are talking about earlier in the year, and whether this has any meaningful impact on production and earnings power of the firm so that next year and into the other after whether this is just a timing issue and the impact overall will be negotiable for next couple of years?

Simon Henry

Okay thanks [Martine]. The dividend, the cash flow has been strong gearing at 10.8%. We are targeting as I'm sure you are aware, positive free cash flow next year above $60 assuming we have net capital investment of $25 billion to $27 billion. What I said previously is that really we need to get back to that structural positive free cash flow position from delivering the major projects before we look to grow the dividend.

We are on track to get there and likely to practice just start the year with stronger balance sheet than we have previously expected, and really that’s a decision and the communication for next year. I've to say we have to look at dividend, capital investment or net capital investment and the position of balance sheet together because the three are related, but we're clearly in a much stronger position, once the new project come on-stream and fully up and generating cash. That’s no real change from previous statements by the way.

CapEx under spend for the year-to-date, we have actually spent in a gross sense, total sense and in nine months with $20 billion. We've have always said it was spend between 25 to 30 and typically it’s more likely to be close to 30 of that by divestments. Now, net capital investments, i.e., divestment investments obviously require low because we have effectively spending a bit lower on the organic investments and we’re divesting a bit more quickly.

Our net capital investments of $14 billion year-to-date and does indicate that we’re most likely to undershoot the 25 net, most likely to be in the low 20s. We do expect the organic growth investments to increase in the fourth quarter, it’s been increasing quarter by quarter all year as we’ve seen the impact of the big project rolling off the in the early part of the year. The new projects, for example, Prelude and Gorgon kicking in and some of the other investment decision we've taken this year, so our actual organic investment is back up at a level of round about 8 per quarter anyway so I would expect to get 28, 29 gross for this year and most likely investing in that same kind of level next year.

The net investment will be 6, 7, 8 divestments depending this year on how many weeks actually conclude before year end. We do expect the total level of divestments to come off a bit, as I said in the speech, back and forth towards the two three 3 year average level.

Unidentified Analyst

All right. Given the situation in the Gulf of Mexico early in the year I think you didn’t spend as much as you were planning in the Gulf and also with low gas prices in the United States as all year investments, entire gas project in the United States would be less and obviously if we spend less now you’ll produce less later. I mean, I was wondering what the impact would be of that? It seems pretty much a US question next year as I think about it.

Simon Henry

It’s true. We would have liked to spend more on both in practice because we knew pretty much what the Gulf situation was. We didn’t actually plan to spend more. We would like to spend more. So, our plans for next year did recognize that we’re 50,000 barrels a day short of Gulf production this year due to the (inaudible) incident and will be quite sure next year as well. Exactly how much depends on what the recent assumptions you made though it’s less than we would let's just put it that way.

On the gas side, there’s quite a bit of back-end of the year production. So by the end of the year our production will be round about where we projected on the gas but the average for the year is effectively come out at the lower level because of the phasing that we spend. So likelihood is in both cases it doesn’t make the target in 2012 any easier, but they were built into projections that we have made. And just to be clear overall, assuming we did back up to stage in those areas, we are going to be back up in the top-end of the range of that CapEx spend next year, that is my expectation.

Operator

The next question comes from Jon Rigby from UBS. Please go ahead with your question.

Jon Rigby - UBS

Yes, thank you. Hi Simon. I got just couple of questions picking up on -- a couple of the questions have been asked already. The first is on the Gulf, I mean would it make sense until you have the capacity to actually run at a faster rate, and may be you would have done historically to bring and get the production importantly because that’s MPV on stream quicker through the last call of this year and into next and get those high-value barrels on?

And then, the second question is just on the structure of your cash flow, I guess one could observe a significant portion of the cash flow or an unusually higher portion of cash flow in 2012, 2013, 2014 is going to effectively cost oil or cost gas to be won from some of the big projects you got on. Does that influence your decision about how you use that cash because some of it is essentially structured capital rather than ongoing revenue coming back in, I mean in terms of dividend share by backs balance sheet management etc? Thanks.

Simon Henry

Okay, thanks Jon. The Gulf of Mexico, can we run faster, well, yes, we got five floating rigs and we're just operating one platform rig at the moment. So six drilling activity and we could ramp up a couple more rigs where we have the permits in place. We have some pretty well in terms of returning to activity on a competitive basis. We have been fortunate to have more permits in place earlier than others. Having said that, the average time to get a permit currently running over 200 days. It used to run some of like 50 to 60 days. And while we did better than that 200, we need to keep moving on a significant number of permits to be able to keep just to five rigs busy let alone more than that.

And we do have the opportunity, we got quit a lot of development really to do around the detail and (inaudible), as well as the exploration discovery that we are following upper momentum. So, could go faster, and would like to go faster constraint are not out, its can we work our way quickly enough through the permitting process, which is becoming reasonably well established now and good constructive process, its just taking a bit more time.

Cash flow structure, 2012, 2014, we are not that (inaudible) is coming on that and one really is Pearl GTL obviously a big one. I think you kind of seen from some of the charts we produced recently that they the cost recovery does not -- I should say, our cash generation doesn’t add to the cost recovery, you don’t produce strong underlying cash flow generation post full cost recovery period. And it's about seven or eight years the $70 obviously is a shorter period if the price were to be higher.

No, we don’t think of the cash flow coming in any different terms as to, to what we should do with it. Cash is essentially plentiful. We have strong cash flows well beyond the end of full cost recovery in Pearl and the same is true on most of our other PLC activity and total PLC activity is just over 20% of production. That will have gone up from just under 20% production by the time Pearl is up fully running. So, I think it's about 23% next year. And so, we don’t think differently. And we have a plenty of other sources of cash flow that will be generating growth in that period.

Operator

Thank you, the next question comes from Irene Himona from SG, please go ahead with your question.

Irene Himona - Societe Generale

Two questions please. So, first you resumed to share buy back in the quarter aiming to neutralize the dilutive effects of the scrip. So this scrip is not actually saving any cash. I struggle to understand why you still offering the scrip as an alternative? My second question was on production, if there is any guidance you can provide short term for Q4 in terms of what you expect coming back from maintenance from the Gulf Mexico recovery and also the new project? Thank you.

Simon Henry

Thanks Irene. I guess probably a little explanation on the scrip is helpful. It was not a tactical move to generate short term cash or reduce (inaudible). It was a strategic long term move to offer the scrip program to shareholders and they are options, so its not been forced upon shareholders hopefully and some shareholders find it valuable. And in fact, roughly 30% on an average are has been some (inaudible) have done so. $3.2 billion worth over the past four quarters. So, for us, what it does is create more cash flow flexibility through cycle. Our industry is a constant battle between volatile revenues and relatively constant or difficult to varying the short term cash out flows such as investment and dividends. So, we need to commit, be able or have a balance sheet structure and financing that enables us to commit the long term investments. The scrip gave us just a little bit more flexibility in doing that and is equivalent roughly to a $10 per barrel reduction in the breakeven price. That’s the way it's actually worked as in practice.

We also said we aim to buyback through the cycle in a way that’s offset the values and in practice we would like to do that at a price below what we issued the scrip up which is what we have done. So, there was an element of opportunism in the markets we buyback while the cash flow is stronger, doesn’t mean we will continue necessarily. It’s a not back place to be with lower gearing, strong cash availability and liquidity in a period of what might be some macro uncertainty over the next 12, 1 8 months.

And production guidance for Q4 anyway, can't really give precise guidance though although you do pick up a couple of important points. Qatar ramp up, we have potentially some tens of thousands of barrels to come just from Train 1 ramp up; Train 2 isn’t likely that much impact, it's more likely to come into towards the end of the quarter. Qatar and Athabasca won't -- Qatargas 4 and Athabasca may add a little bit of volume in the quarter but there is not too much more but in the fourth quarter.

We did have some maintenance shutdowns in both the North Sea and then in the Gulf of Mexico particularly in the Gulf (inaudible) which are not operated by ourself. Hopefully, they will come back. There is a bit of an upside. But the main factor in fourth quarter production as always is the weather in Europe. Fundamentally, our gas production is tied quite closely to the temperature. So far it has not been particularly cold, and it was a relatively cold quarter in the last year I think. So that’s the main factor outside our control. Hopefully, that will give you some indication of the things to watch for.

Operator

Thank you, the next question comes from Robert (inaudible). Please go ahead with your question.

Unidentified Analyst

It looks like you have got at least four options in front of you for exploiting the BT discrepancy in North America between crude or liquids or refined products in the one side and natural gas prices on the other. You have got what seems to be a growing potential for liquids rich shale transaction with you and everybody else which might speak the potential price point or lack of attractiveness there depending on the base and understanding will be quite about that. You have got western Canada export of LNG potential which you have clearly done in the past outside of North America, northeast ethane cracker and then now US Gulf coast based GTL plant. Can you rank those options for me?

And as it relates to the GTL plant, it seems as though it might be a pretty capital intensive option. I know you’ve done well with Pearl but is the cost of construction not perhaps higher in the U.S Gulf Coast versus Qatar, and even though the shale gas keep seeming to be get better as a feedstock, it seems tough to meet the bar set by the Northfield and Qatar cost of supply standpoint. Any thoughts on that?

Simon Henry

Thanks Robert, you’ve done your homework. Unfortunately, you've missed one. There's the Canadian Green Corridor, the gas L&G effectively strength --

Unidentified Analyst

But the biggest one of all I guess.

Simon Henry

And to liquids transport so priority is a question of two things, one overall economic and strategic attractiveness, and secondly there's the time scale of doability. Clearly that one is doable more quickly and therefore liquids rich shale gas fall in that category as well. And yes, we are active although so far minimal impact on results. So those are the top two in the short term direct access to the effectively the liquids pricing in the North American market.

The other three, the export of L&G from British Columbia to Asia, potential ethane cracker in Pennsylvania, and potential gas to liquid on the Gulf coast are all viable options economically but none of them are going to happen in the short term and they’re all capital intensive. The most progress is essentially the L&G export where we’re looking at land pipeline and production together with three Asian partners, PetroChina, Japanese and Korean partners. Still early stages, but that’s genuine agreement in place and looking to put together the full value chain. Clearly attractive to take forward all the gas to Asia where the price in the last quarter is around $15, so quite an arbitrage to support the investment.

The other two, the ethane cracker and the US Gulf gas to liquids, it is a question of two things. One the cost of development and secondly for how long do we think that the gas to liquids price differential will be sustained perhaps at a suitable level. At $4 gas and $100 oil, roughly or $110 oil at today’s price both of them are economic. Whether we will go ahead immediately will actually depend very much on where we can get the cost of both projects downturn because we like the robust to get the environment rather less attractive than the $4 gas and $100 oil. So we need more confidence that we can get the economics to the point where it justifies what in both cases and for all three cases it will be a multibillion dollar investment for 20, 30, 40 year investment horizon.

Unidentified Analyst

What would be the earliest possible day you see GTL product on the US Gulf coast?

Simon Henry

I think you say that the Qatar project took five years construction 2006 the investment decision, might do it a little bit more quickly in the US, but we need to go through a feed process as well for 18 months, you can add to that 12, 18 months and we went on to the point where we are going to feed. Well, we are doing some design work, potential design work and what we have identified a couple of possible signs, but you know you at least take seven years or even if we took a decision tomorrow.

Operator

Your next question comes from Jason Gammel from Macquaire. Please go ahead with your question.

Jason Gammel - Macquaire

Thank you. Simon I had a couple of questions about the trading environment in 3Q and its sustainability. First of all, your downstream numbers are looked handily beat the consensus and that’s actually been a fairly consistent pattern with your peer group. I was wondering it’s the large drop in crude prices over the course of the quarter, which obviously to have a subsequently rebounded what in the outside trading profits that would have shown up in the downstream business? And then secondarily the LNG trading environment was obviously strong in 3Q. Spot prices in Asia appear to actually be on the incline, would you expect that the LNG trading environment gets better for you.

Simon Henry

Thanks Jason, good questions but volatility and the downstream always will have the trading activity. Having said that, structurally you think about portfolio. Our refining cover for marketing sale is reducing as we divest in our portfolio of refineries. Our trading and supply activity that is essentially the way we join that to include molecules to retain customers and it is becoming more and more and more structurally contributed to the value chain. Therefore, our trading activity and the profits associated with have outgrown steadily over, over previous year. This is not the Wall Street trading activity we have a need to move crude through to products to our customer.

And therefore, it’s becoming much less meaningful overtime to look at refining, trading marketing as this separate parts of the value chain; they are not independent. Though trading have a good contribution in the quarter it was not necessarily driven just by crude price volatility, it was driven by bold market opportunities between crude and customer.

LNG trading, it was a good quarter, very much so. We actually had 26 cargo diversions that’s nearly doubled where we were a year ago. Partly, that’s driven by agent demand and partly it’s driven because we today have access to more LNG on our own account to do that type of activity. Fundamentally, we are moving cargos that were maybe initially planned for North America into higher-value markets. Europe where average realized gas price has been $9 Asia around 15 for the quarter. So, generally a good quarter of opportunity and demand for short-term delivery following the Fukushima accident earlier this year and some of the choices, and European energy policy has been quite good. Then you need to look at both downstream and upstream trading as substantive, sustainable and variable strategic volume leaders for Shell. They are not opportunistic to and they are not short term.

Operator

Thanks. The next question comes from the Lucas Herrmann from Deutsche Bank. Please go ahead with your question.

Lucas Herrmann - Deutsche Bank

Couple if I might, can you just help me out with some numbers. I am just trying to understand what happen to Americas profit this quarter? I mean I would have anticipated given the improvement their USP your profits would moved north, and also that you are not carrying any LIBOR rate cost any longer or the LIBOR rate cost was modest. And yet, relative to Q2 your profits are about $400 million down. And similarly just looking at the profit breakdown post exceptionals there are other areas which includes Qatar and includes Pearl, despite production being flat to up, the profit numbers also made no headway. So, perhaps there is if you can give some insight and color of those because it would be helpful. And then, I will ask you a further one after that if I might.

Simon Henry

See who long the first one take Lucas. UA profit is relatively typically had some down time in oil sand. The bitumen realized price in some weeks was in the $50, as opposed to what you might have expected closer to WTI. And, we had a lot of downtime in the Gulf of Mexico, mainly BP operated (inaudible). And we did have some shut in time, plant shut in time in March and August, so some temporary effects on the oily or the liquid type activity.

Lucas Herrmann - Deutsche Bank

As the upgrade is fully up and running, the bitumen discount should negate there (inaudible).

Simon Henry

Some of that goes through in the downstream, Lucas, the upgrading margin. So the upstream is taking some of the apparent pain from the low bitumen price.

And, can you just explain what you really meant by others as I am not quite sure what it is.

Lucas Herrmann - Deutsche Bank

Sorry, so I am looking at international, I am not looking the other category for upstream. You got Europe, Asia Pacific and other, other includes the Middle East, includes Qatar. Profit is actually declined despite, if anything, production being up overall for that region or the international or the other region. I guess my expectation would be as the benefits as the benefits of those start to come through we would actually start to see this quarter some improvement and profitability there.

Simon Henry

The profitability is not picking up strongly adding Qatar on lose couple of hundred million in the quarter. It’s slightly better than it was because Pearl is on the roll and does that back in Q2 as well.

Lucas Herrmann - Deutsche Bank

So, Simon, when you say a couple of $100 million that’s for LNG and GTL.

Simon Henry

It is, it’s for both. In the quarter, I feel it was more like breakeven in the early quarter. The profitability in other, say it does include Africa, and Nigeria was again slightly down ass well, but nothing structural in terms of longer-term implications. And in Russia which can be in fact it is probably about the same thinking in Russia. So, there is nothing substantive below behind that.

Lucas Herrmann - Deutsche Bank

Okay thank you. And then just, on the downstream I mean I take it the rise on profit is being taken in the marketing and supply business?

Simon Henry

Yes.

Lucas Herrmann - Deutsche Bank

On which basis does it $500 million or so improvements in refining. How much of that is coming through from cost? How much of that is been about availability because margin hasn’t really moved anywhere?

Simon Henry

The industry margins may not have moved, but our ability to take advantage of them was better in the quarter. And, particularly the Canadian refiner is including (inaudible) in Toronto were able take some advantage to better advantage of that 150, $200 million any which way we calculate that rate.

And, the refining as an improvement would help that plus some of the differentials in Europe worked in our favor. So, we have the diesel relative to the market diesel producer, and that basically will help plus the availability was up at much better level, and the non-availability on an unplanned basis was down to the more acceptable level. So, it was one of our best quarters in terms of operational performance. That is basically it.

Operator

The next question comes from Iain Reid from Jefferies & Company. Please go ahead with your question.

Iain Reid - Jefferies & Co

Firstly, is it possible that you could tell the 800,000 barrels a day of production you're bringing on between an 2011 and 2014, how the cash margins of that compare with the existing cash margins of your base business? And secondly another topic, on exploration CapEx and well drilling, could you tell us what you are think it going to be spending drilling this year in terms of numbers of well and how that compares to what you are expecting to do next year?

Simon Henry

Thanks Ian. First, it's difficult to be too quantitative on the first question, the unit cash margin because it depends on price you see. The one thing we have that ...

Iain Reid - Jefferies & Co

Let say the $100.

Simon Henry

On average its better and that's what drives for example with our 11% production increase between 2009 and 2012 driving 50% more cash flow it’s fundamentally because the unit cash flows of the new productions are better then the old. And that we underline drive of the typically fairly clam a lot of the new production is big eye on that -- that is large capital investment but go forward below operating expense -- operating cost spend and quite limited the future capital requirements in projects just as GTL any LNG or (inaudible) or the oilsands.

So the fundamental major in the shape of the portfolio has changed. They also have probably realized as well and basically lower old more stable physical environment. And physical environments, which left of the creaming higher oil and gas prices. Those were strategic choices, which when I am seeing playing through in today’s margins and the whole price were increasingly up to 2014.

The exploration spend this year likely to actually to new acreage on position which we have been doing quite a bit with in the sort of $3.5 billion range. Not sure how many wells difficult again to quantify, so we have a lot of exploration wells onshore. I don’t know maybe somewhere between 3 and 10 million. Both were significant number offshore rather more each more like 150 each. I don’t have a break down with me. But we are expecting to continue of at least that level. In fact, the new acreage we've taken on very attractive should help give us more of an opportunity going forward. What I would say as we are actually the middle of some -- well beginning of some exciting activity of the movement we are still completing with the site tracking in French Guiana. We just found it near the Petrobras opportunity in Tanzania, 50% there. we are drilling (inaudible) appraisal well in the Gulf of Mexico. We just bought the BMS 54 which is the 80% Shell block (inaudible) Brazil. We are hopefully getting enough production to drill in Alaska. We are drilling in China onshore and there is a lot of onshore activity in North America. So, it’s quite an exciting time and, if anything, we will be looking to increase the level of activity next year.

Iain Reid - Jefferies & Co

Just one quick one on (inaudible) if I could, well, when do you expect to complete the site track?

Simon Henry

You need to talk to the operator on that (inaudible).

Operator

Thank you, and then the next question comes from Mark Gilman from Benchmark Company. Please go ahead with your question.

Mark Gilman - Benchmark Company

Two questions, if I could. Could you be really specific in terms of what the volume contribution both liquids and gas or Pearl was in the third quarter?

Simon Henry

Just over 70,000 barrels a day.

Mark Gilman - Benchmark Company

Equivalent?

Simon Henry

Yeah.

Mark Gilman - Benchmark Company

Could you split that please?

Simon Henry

No. (inaudible) what I can't tell is the ratio of liquids to gas is higher now than it will be as we ramp up. If they worked that particular liquids rich and then the lower ramp phase. Good idea to call IR later on that one, sorry Mark.

Mark Gilman - Benchmark Company

Okay. Other question, I was particularly surprised by the stress of the chemicals earnings in the quarter, seem to have defied particularly versus the preceding quarter, the second quarter the trend in margins, and also specific reference to the contribution of equity interest. Could you put some color on the chemicals number.

Simon Henry

670, in the course of the best ever quarterly results. They clearly are benefiting structurally, but this is not necessarily top of the chemical cycle at the moment. The benefiting structure is on that switch we talked about earlier in terms of gas feedstock in the US. We are continuing to do a little bit here a little bit there in terms of investments and work around work to ensure, we maximizing that opportunity in the US which we're definitely benefiting from today in the manufacturing side. Still reasonable margins in the market there.

Our equity chemical includes activities in the Middle East and then China. They are both well positioned for the markets. Remember, we're not a broad spread of particular petrochemical products, we are relatively specific. And things like the NEG, the (inaudible) and those are markets where we have good direction and did well in the third quarter. I have to say where our chemical guide has been through so many product cycles, they’ve been telling this about two years now, this particular bubble will burst but it’s continued with a pretty robust performance against a volatile environment and the North that easy macro positions. So may be they just have done well in restructuring for a more robust position in through cycles. We’re very pleased at what we’ve been able to deliver.

Mark Gilman - Benchmark Company

You can just sneak in one other quick one. A comment on your average LNG realizations in the third quarter say versus the second or the year ago. I know the rough but can you put some color on that?

Simon Henry

Definitely up against a year ago and up against the second quarter overall on the grounds that there’s a lagged oil price here. So we still benefit from the rise of the oil price earlier in the year. Besides the offsetting that is quite a few of the diversions be going to Europe. That’s obviously better than sending them to North America but on average is less good than into Asia. So those are the trends but is up in both cases.

Operator

Thank you, sir. The next question comes from Oswald Clint from Sanford Bernstein. Please go ahead with your question.

Oswald Clint - Sanford Bernstein

Thank you very much, Simon. Just a question on Arrow and Dynan Australia, I'm wonder if you’re also looking at potentially some tight sands sort of you know down below the cold seas across your joint venture, your acreage? And secondly just the interest that you could elaborate on one of your earlier comments on the demand slowdown you’re seeing across some of your businesses. (inaudible) in the downstream could you say more on which product or which geography? Thank you.

Simon Henry

Thanks Oswald. Arrow, we basically have two DBMO or CSG built in gas positions, one in the Surat Basin, it’s close to the Brisbane, and one in the Bowen Basin on which you just added with the acquisition of both. In both cases our prime focus is on the liquids the coalbed methane rather than on gas in the Titan. There is some in the area but that’s not our prime focus.

And demand slowdown, difficult to separate this one out just to what type. Actually structural, what can we do to weather or other effects but it does provide us to the slowdown in North America and Europe something around 2% in the retail business is primary where we seen this. Our commercial sale is actually quite strong so things like aviation and marine.

On chemicals, does seem to be at least the market that we see some slowdown in demand although we maintain down position reasonably well. In Asia Specific, that can also be exacerbated a bit by the fact that new supply is coming online as well, but sometimes difficult to separate the two. Chemical demand which is a after the precursor of further macroeconomic movement was reasonably healthy in the US. So, quite a big picture overall, but demands for liquid products in develop markets, few liquid fuels products is by and large down a bit. Hopefully, that covers the pitch.

Operator

Thank you. The next question comes from Alejandro Demichelis from Merrill Lynch. Please go ahead with your question.

Alejandro Demichelis - Merrill Lynch

Quick question just to clarify another comment you made, when you are talking about the deceleration of the sponsor program are you talking going back to the guidance that you gave us in February of around $3 billion per year or is it going to be lower then that?

Simon Henry

Divestments would always expect to be doing $2 billion or $3 billion a year, its just normal business turning over assets late life or otherwise. So that’s the kind of level. It may not decelerate there indeed that we started this year without too many more aspirations beyond that. But we've accelerated and effectively been a bit more successful. So, it’s just part of the normal business, at the 2 to 3 level.

Having said that, we will back over the first six or seven years, the average is somewhat between $6 billion or $7 billion. So, I mentioned $34 billion in five years in the speech, if you add a couple of years on well, we are well over $40 (inaudible) something around $45 billion I think that we sold in that period as part of normal business and capital discipline within the company.

Operator

The next question comes from Jeff Dietert from Simmons & Company. Please go ahead with your question.

Jeff Dietert - Simmons & Company

Couple on the downstream, could you provide and update on multiyear Port Arthur expansion, how far long and construction when you expect initial ramp-up to start and complete full ramp-up? And then secondly, you talked about the Singapore refinery restarting in the fourth quarter, will that be back to normal operations this quarter or will it be some lingering issues there?

Simon Henry

Thanks Jeff. Port Arthur is 90% complete in terms of a construction. Well, we are already working on some of the units, and due to warm them up and bring them in but effectively will not have any impact on production until early next year. There are multiplicity of units there. We are going for 325,000 barrels a day to around 600,000 barrels a day with full upgrading capability. So, it’s a very large activity. So we are warming up the utilities at the moment. They start up is in during the first half of 2012. So we are on track for our expectations there but limited impact, if any, on 2011. Should start fee contributions from Q1 onwards 2012.

In Bukom, we are bringing the unit back up. We are not fully back up yet, but by the end of December we really ought to be back up to fall through report. What we are, you may recall the fire was actually in the pump as a blending unit. So, it wasn’t a process unit. We have work around the place but to get back to full capacity we do need to replace some of our capability which takes time. We need to do properly, but it’s not large process scale units that we are working on. So we should be back up really by the end of the year there. Hopefully that comes at the $150 million I talked about an earnings impact addresses all of that downtime

Okay thank you. We have got one more question at the moment I believe

Operator

Thank you. The final question comes from Jason Kenney from Santander. Please go ahead with your question

Jason Kenney - Santander

Hopefully the best for last. So, if the markets continue to stay weak does Shell buyback more shares the scrip dilution (inaudible)? And secondly on the Tanzania [farming], when does that well complete, and can you say anything in terms of target size even in the kind of elephant or big cat type of terminology? And then just following up on (inaudible) question earlier, could you give me an idea of the incremental cash flow uplift you are expecting once you get to full operational capacity there?

Simon Henry

Thanks Jason. If the markets stay weak we will continue the buyback program most likely unless the oil price starts to fall as well. However, catching up with the scrip will take some time we've limited for technical reasons to effectively B shares for the moment and that limits the trading amount that we can actually do in a day to no more than 25% of the traded volume on the London market. So at the rate the scrip is being issued we almost have to go at that rate to offset if any given quarter. Therefore, it’s a bit of a moot questions as to whether we go beyond the dilution if the markets remained weak. It's a good question to ask near time maybe we've actually gone to the catch-up point.

Jason Kenney - Santander

I’ll remember that.

Simon Henry

Tanzania farming quite excited about it. Could be a good prospect. As you're probably aware gas based it’s a gasy place, so, its gas that we've be looking for, can't really give details on the target size. Hopefully, we will know more by the time of the next quarterly call. We are not the operators. I can't really give any data that was on timing. But we are very please to join Petrobras, good operator there and look forward to the outcome moves out some of the blocks in Tanzania that we held for quite some years now and they're actually in an area of interest for Zanzibar and Tanzania. So, we are hopefully we can unlock those and we got question quite traffic prospects overall in the region.

Motiva, cash flow outlets, how long it will be say what refining margin do you see on the Gulf coast. It's clearly full upgrade (inaudible) to be at the top end of the yield capability and delivery compresses just about any crude by the time that’s up in running. And that's an extra terms in 75,000 barrels of the day full upgrading capacity. So that -- you probably do the same just all on what you think the refining capability or refining margins are going to be on the basis that is a highly effective unit.

I will have to say that as I already mentioned, the cash flow is actually the dividend coming out of Motiva. So, it needs to be an assumption of the dividend coming out but by and large were similar to the earnings. And (inaudible) that covers it. We do have actually one more question now please, operator.

Operator

The final question comes from Lucy Haskins from Barclays Capital. Please go ahead to your question.

Lucy Haskins - Barclays Capital

You've said in the past that once in Qatargas 4 and retail at best it has to fully ramp. You might have set a $4 billion contribution in a $70 world. How might that change in $100 world? And the second question was to see if you can give an guesstimate of where your Gulf volumes might be in 2012?

Simon Henry

Qatar at a $100, can't really give you figure of that partly confidential but clearly better than four. And back to the earlier question clear at a $100 we've had to recover the cost in more life four fully, the four plus or minus year rather then the seven or eight but it would take at $70. But essentially world is like the standard production sharing contract even though technically it's a revenue sharing contract. So, upside it's pretty good.

I will say that’s certainly in the next few years the 400,000 barrels a day that we were expecting to produce in Pearl, in Qatargas 4 and then in the oilsands, although that was stated at obviously originally at $70 production entitlement in the first few years it doesn’t change materially at a $100. So, I think that helps. Sorry I don’t know the other question. Second question was the?

Lucy Haskins - Barclays Capital

I’m sorry that was, could you give a guesstimate in terms of you might say it (inaudible) as we stand in 2012?

Simon Henry

The Gulf has declined around to 20000 to 30000 barrels a day at the moment, we would hope but we (inaudible) of a 70,000 barrel a day and hopefully rise in as we drill in those developed wells. We would hope to pick up at some time during the (inaudible) not clear exactly when you need talk to the operator to see the Tongo should online there has been a quite bit of drilling and to help sustain product over (inaudible) still to come. So we should reverse the decline that we see in (inaudible) Condo, difficult to say at this point exactly by how much. That's the best I can do for you. Hopefully that helps.

Okay, I think we are actually done today no more questions. Thank you very much to all the both for your questions and joining and listening today. If you do have any further questions please feel free to call me Investor Relations team. And we will first step a new online Q&A site on the IR website, where you can ask your questions direct on the web. You also, I trust all that we are using out IR applications on your iPad and hopefully all helpfully and improving your understanding of the strategy and the performance of Shell. So, hopefully find all of this useful, we like to be innovative.

The fourth quarter results will be released on the February 2, 2012. Pleased to say that Peter and myself will be available to talk to all then, and I very much look forward to that. Thank you for listening.

Operator

Ladies and gentlemen, this concludes today’s Royal Dutch Shell Q3 results announcement call. Thank you for your participation and you may now disconnect.

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