Shell plc (SHEL) Q1 2014 Earnings Report, Transcript and Summary

Welcome to the Royal Dutch Shell Q1 Results Announcement Call. There will be a presentation followed by Q&A session. (Operator Instructions). I’d like to introduce your host, Mr. Simon Henry.

Many thanks. Ladies and gentlemen, welcome to first quarter results call. Let me run you through our figures and some of the portfolio development, before taking your questions. And many thanks to the US joining early today, we are not planning a time slot like this every quarter. Please believe. First of all the disclaimer statement, move onto our priorities, our long term strategy is sound, and we are working towards a successful implementation of that strategy. And the financial framework is clear and it is consistent. Our first quarter results reflect more robust levels of profitability. However, as we saw in 2013, there is high volatility in the macro, and high volatility in our own quarterly results. So, not withstanding today’s results that is no complacency here. The priorities we set out for the start of this year have not changed. We are determined to improve our competitiveness, and we will balance growth with better returns. This means focusing on better financial performance, on enhanced capital efficiency which includes more selectivity on project choices, and that increase in the asset sales programme, and of course continuing strong project delivery. We are repositioning the company for changes in the industry landscape, particularly in Oil Products and the North America shale plays. The impairments that we announce today, in Downstream, reflect our updated views on the outlook for refining margins, where there are substantial pressures on the industry. We are also taking hard choices across portfolio, with some $4.5 billion of asset sales announced in the quarter that included Wheatstone LNG in Australia are in Downstream exits from four countries. Our investment strategy is delivering at the bottom line. The first quarter has seen new, profitable production from the deep-water Gulf, a ramp-up in Iraq, together with the new LNG from…

Thank you. We will now begin the question-and-answer session. (Operator Instructions) First question comes from Alejandro Demichelis from Exane .Please go ahead. Alejandro A. Demichelis – Exane Ltd.: Yes, good afternoon and thanks for taking the question, just one question Simon, in terms of the performance obviously in the first quarter, maybe you can tell us how much you think of the improvement has come from some of the new initiatives or should we expect the new initiatives to further improve these kind of level of performance?

Thanks, Alejandro and it’s a good question and no specific answer I’ll step back a bit, what we saw last year and it was very clear about in recent communication as that. When you brake down the portfolio and disaggregate there is some very strong performing parts of the portfolio, we saw integrate gas again today. Eagle has great potential as the growth comes through, not yet coming through just to be clear, but the projects are pretty much on track to do so. The mature Upstream performs well, so there was couple of areas where we are very clear, we know we need to do to better. Improving returns in the first instance and creating a growth platform at least in the Shell potentially advance of the Downstream as well. So the Downstream and it was the unconventional results. And we also planned to deliver slightly lower exploration expenses by drilling slightly more successful exploration wells. And we see on the later a better performance in the earnings contribution from the exploration that move to trend level. And so oil products, both oil products and shell these are long-term improvement programs. So yes there is some improvement, but we are only beginning a much longer journeys and Downstream overall in fact has a much more robust underlying performance this quarter and did a year ago, even though the results were down because actually they were funding margins are much more attractive a year ago. What we have seen progressively over the last three years, really since (indiscernible) over the downstream some of the changes he made then only, but the organization the way we’ll look to manage the fuels value chain, some of those are coming through in a more, what we believe in sustainable way, and in fact…

Thank you. The next question comes from Irene Himona from Soc Gen. Please go ahead. Irene Himona – Société Générale SA: Thank you good afternoon. Simon, it’s Irene, Soc Gen.

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

Thanks Irene. The process in a nutshell we spent quite sometime rather longer than we had originally reviewing the impact of those secular trends on our future projects refining margins, both at the global, regional and individual asset levels. The reason it’s taken time is that the trends are quite significant, and fundamentally Mogas versus diesel demand the emergence of significant liquids from the shale plays in North America, which are both light, but also feeding with some prices disconnects that U.S. refining system. And then finally the fact that I’m afraid the Middle East and Asian countries continue to build massive refineries with highly competitive that low cost and damaging returns for everybody. So all of those three things are playing at overtime and there are quite some different ways depending on how competitors react, e.g, closing refineries or changing their positioning in the value chain. So we looked globally, regionally and at every single assets. So we looked at the U.S., we looked at EU, we looked at Asia, we play out in different scenarios, we compare the potential future asset value and net present value terms against the book value. And this is the end result this is good as we can do out this current point in time, just reminder in fact we have a total asset base in refining is less than $20 billion before this write-down. And that is clearly, less than 10% of the capital employed in the group. So, important but not massive in group terms, I cannot say where we are going forward because all of the facts I talk about, they do continue to evolve over time. There is no direct linkage between impairments and portfolio actions although clearly the economic analysis does have some barring on that efficient process. And cash flow in first quarter it’s all way challenging to look at only three months cash flow at partly the reasons you state, we do include the tax payment. Q1 is always a low tax payment year last year we didn’t make much profits by definition this year we will pay less tax than we did in the previous year. Having said that, no I can’t make a forecast on three monthly basis going forward, but just remember Q2 and Q4 are both higher tax payment quarters Q1, Q3 usually lower tax payment, to be important number for us as the 12 month rolling with the uptick that you see there to $43 billion. And just to point working capital overall $8 billion over the last nine quarters while the oil price haven’t really moved and is no access and that is much better management for inventory levels and underlying working capital. So that reflects some of the genuine structural improvements in the way we do business particularly in the Downstream and I certainly don’t include it from cash flow management and planning when looking at the financial framework. Irene Himona – Société Générale SA: Thank you

Many thanks, Irene. The next question.

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

Yes, thanks Theepan. Arrow LNG we frame it – describe it as reframing our divestment, we’ve been looking for opportunities to monetize the asset in a way that is less capital intensive and building a fourth LNG plant, and it is the best way to state that, which means potentially talking with all the other players in the region, how we get our gas to the market in the best way. We are currently working potentially with all three is to what is the best way to monetize, and the real priority is reframing of the development concept more than it is divestment, but I can’t say clearly than that – clearly an opportunities to contribute our molecules to other peoples infrastructure in a way that is mutually beneficial. Chemicals in the United States, this really I think is a question about potentially investment in Pennsylvania based on ethane source from the Marcellus field. It is a – remains a potential project, we are doing some front-end engineering and design work, but it is not yet a final investment decision. So there is still quite a bit of work to do to ensure first of all the costs and then secondly the margins at both ends, the sales revenues and the cost of the ethane are sufficient to support over 20 plus year lifecycle to support an investment upfront, would be a non-trivial investment, multi billion dollars if we have to go ahead. So it’s quite well at times, but we are still someway from the final decision. Theepan Jothilingam – Nomura International Plc: Do you think that's an event for this year, or does that roll into 2015?

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

Thank you, the next question comes from Lydia Rainforth from Barclays. Please go ahead. Lydia R. Rainforth – Barclays Capital Securities Ltd.: Thanks, and good afternoon Simon. A couple of questions, if I could. The first one was just a very basic one on Cardamom and when you're expecting the startup for that one. And then the second one was on just something that you were quoted for saying on Bloomberg earlier about BG having some attractive assets. Could you just remind us what your criteria for acquisitions is at this stage within the restructuring of Shell?

Thanks, Lydia. Cardamom is 100% relatively small but up to 50,000 barrel a day tie back in the Gulf of Mexico to the Auger platform. The work is all done on the platform. We are drilling the wells, we look to hook up and ramp up production. There won’t be a little bit of second half when it comes on. And depending on the pace of the ramp up which if it follows Mars B shift would be good. But they may not be a material contribution in 2014 it will contribute more significantly to 2015. And acquisition of assets and interesting question bearing in mind its only three months ago since mostly the question were in the opposite direction. So perhaps we haven’t had enough discussion recently about the criteria internally. The criteria for acquisition they are saying, they are all for organic investment. We look at range of economic outcomes but also the sensitivities and risks and the strategic fit in particular across price range 70 to 110. We expect obviously positive NPV. And we may – it depends on the assets we vary hurdle rates anyway in for organic, in the sense that certain assets provide infrastructure around which you will develop for many years they may attract a lower hurdle rate and then incremental assets the driving to existing pieces of infrastructure. But same applies to M&A work but more generally we’re always interested in assets difficult to get too interested in companies and partly because of the price sensitivity high in part because you end up paying the premium for assets that are not the good strategic thing, and that really change that general statement today. Thanks for the question, Lydia. Lydia R. Rainforth – Barclays Capital Securities Ltd.: Thank you.

Thank you. The next question comes from Fred Lucas from JPMorgan. Please go ahead. Fred Lucas – JPMorgan Securities Plc: Hi, Simon, it’s Fred. A couple of questions. Good afternoon.

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

And second point is correct, Pearl I have to say it remains confidential for obvious reasons. However, if you track back to previous charts from three, four years ago we just gave an outlook of 70, you have to subtract a couple of years almost by definition from the point at which reach cost recovery, so its doing extraordinarily well at the movement the same chart will note that you also don’t see a massive step down in returns on the first point of full cost recovery, so it will retain and remain a very strong return and cash generator for many years to come. Fred Lucas – JPMorgan Securities Plc: Much appreciate it's confidential, but given how much higher prices have been versus that $70 reference, do you think it transits 2015, or is it later, 2016?

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

Thanks.

Thank you. Your next question comes from Thomas Adolff from Credit Suisse. Please go ahead. Thomas Y. Adolff – Credit Suisse Securities Ltd.: Hi, Simon.

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

Hi, Thomas, have to think about the second question. Motiva, the improvement in performance really is all cylinders, better operational performance particularly in Port Arthur. That enables us to be both more selective about the crude and more able to maximize the flow of the molecules into and out of the refining network. We have bought cheaper crudes there and we are maximizing the effective marketing show that the Motiva have embedded. So in fact in the last six months it’s been back in profit. Is it profitable enough? And probably not yet, no. But it is cash flow – we would expect to see some countries in this year ahead of earlier expectation. The crudes flexibility, yes we are doing quite a bit of that, but not as much as we would like and this is essentially logistic constraint. You physically have to get the crude to the refineries, particularly in both Norco and in Port Arthur. So there is more to come, but that needs to be effectively better access to the pipelines and to some of the cheaper crudes that we need to get into Gulf Coast. A buyers' market on the sales, it’s our first principle while that maybe true in general it’s not necessarily true specifically for the assets that we have been telling, for example the Australian Downstream, and the Nigerian onshore assets they have been quite significantly competitive, let’s put it that way. They’ve been – good prices achieved. When it comes to partial deletion, where we are talking about strategic partners such as Chinese, or Russian, or Qatari friends, I think it’s quite important shale ability to operate, and the operational skills and capability that they look to bring as well is very important. Where we got lead down that is preference for us to do with somebody have much broader strategic relationship and there is a higher level of trust and understanding of each other. It’s very difficult to say if you end up just purely in cash or economic driven transaction. How much value a buyer would associate with the shale operated asset. I would like to think quite significant, but I our real strategic priority and preference is to work with for example the Chinese, Russians, Qataris, Saudis, Brazilians with whom we have quite a good working relationship already. Thomas Y. Adolff – Credit Suisse Securities Ltd.: Okay. Perfect. Thank you very much.

Thank you. The next question comes from Martijn Rats from Morgan Stanley. Please go ahead. Martijn P. Rats – Morgan Stanley & Co. International Plc: Yes, hello. Simon, I wanted to ask you two things. The North Sea has seen a lot of maintenance last year, and it sounds like maintenance overall is coming down a little bit. Also, looking at the 20-F, the North Sea performance appeared reasonably weak last year, and I'm just wondering if we could perhaps be at a bit of a turning point for the North Sea. If you could comment on that. And secondly, I wanted to ask you, slightly taking away from the quarter per se, but if you look at all the annual reports that have been published lately, finding and development cost is continuing to trend upwards. And at the same time, there seems to be much more focus on capital discipline in Shell and elsewhere. I was wondering if you had any view on where this relentless rise in F&D cost could go. Are we at a turning point for that one too? Or will this likely continue? If you have a view on that, that'd be much appreciated.

Many thanks, Martijn. You maybe doing more study than I do, at least I’ll help try and give the questions justice. The North Sea maintenance it wasn’t just maintenance last year it’s general under liability on predictability or difficulty bringing assets back on stream. We were at the low 50% availability relative to 100% capacity last year, just the industry only did 60% and that’s a quite a good reflection of the challenges of operating in difficult environment with mature assets. And obviously very high operational standards that we all need to meet there has been a little bit of turning point where I think we are above 50% in the first quarter, but it’s hard work. And so there is not a major additional contribution yet, we’d hope that we will see continuing improvement quarter-by-quarter during this year, but we certainly look-forward to the big new projects Clair, Schiehallion, coming on stream and not the two distant future and they are both BP operator, so I can’t give any further details. But they look good projects and they will help the overall performance out of the North Sea. The next question annual reports trend up with unit finding and development cost. I can honestly tell you I really don’t look at their further number it being an outcome from choices that we make decisions that quite often taken many years ago and it reflects so many factors that we don’t manage directly it’s not that helpful even as a long-term trend and the reason I think is pretty obvious in our own results we’re 9% down in production volumes for the same income year-on-year with pretty much the same oil price. So volumes make your own statement on it but we pay the dividend with dollars not with barrels unit finding and development cost is also primarily relevant to what is your revenue per barrel, but if we keep bringing on Gulf of Mexico barrels to replace much lower margin barrels elsewhere, then I don’t mind paying a higher finding and development cost is not necessary reflection of inflation it can be a reflection of deliberate strategic choices, which I think in our case it is. And on last point, I mentioned Iraq obviously Repsol quite a lot of the cost associated with these activities get reflected in certain ratios. But again no volumes it’s all revenue, all value but no volume. So rather less of an indicator going forward, so I am relatively relaxed on where it goes, as long as the projects are delivering as expected. Thanks Martijn. Next question. Martijn P. Rats – Morgan Stanley & Co. International Plc: Alright, thanks.

Thank you. The next question comes from Iain Reid from Bank of Montreal. Please go ahead. Iain S. Reid – BMO Capital Markets Ltd.: Hi, Simon.

Hi, Iain. Iain S. Reid – BMO Capital Markets Ltd.: A couple of questions, please; firstly on your North American shales, et cetera. Having taken this big write-down in the downstream, is there the intention to have a look again at your North American shale position and perhaps go for the same exercise? Particularly given the fact that you're selling some of these assets at what look like rock-bottom prices? And secondly on the scrip. I know you've answered this question before, but you talked about – and the buyback, actually. You talked about the B share trading at a premium to the A share of 7%. It's been stubbornly at 7% now for some months and you’re kind of scaling back on the buyback because of that. It doesn’t look like that's going to change any time soon, and you've talked about the problems with the Dutch tax authorities. So isn't it perhaps time to give up on the scrip and kind of solve your problem that way?

Thanks, Iain. And the first question on the U.S. shale, yes we’ll look again, we’ll be looking continuously and it is fair to say. But what we gave quite some granularity on I think in March is the different elements. We still have $24 billion, $25 billion on the balance sheet for shale, we’re reducing natural ongoing investment, while we evaluate certain of those basins further. About two-thirds of that value within the Marcellus and the Groundbirch, both gas asset, one in Canada, one in the U.S., what we said before was the liquids asset that the remaining liquids asset by and large they look okay, and obviously still to be proven when we develop. Appalachia and Groundbirch, it will depend on the pace of development. And also, in case of Marcellus, the quality of the asset is, we are still appraising that. The West Canada gas is a great resource. It is targeted at the LNG Canada project, having said that reversely the choice to go forward with that project may lead to lower investment if we reserve the molecules for LNG, which may actually trigger an impairment over time, because we’ll be investing less in the short-term. Those are the rules, we’ll see how that as we go forward. And that’s it’s not I wouldn’t realize any further impairment as we are still in the appraisal phase on the rest of the portfolio. I think it’s fairly clearly flagged in the QRA as well. The scrip buyback, your comments are noted Iain. Thank you. Iain S. Reid – BMO Capital Markets Ltd.: Okay. Thanks a lot.

Thank you. The next question comes from Jason Kenney from Santander. Please go ahead. Jason S. Kenney – Banco Santander SA: Hi, Simon. How are you doing?

All right, Jason. Good, thank you. Jason S. Kenney – Banco Santander SA: Two questions, if I may. If I were to add the fourth quarter results and the one quarter results together to get an average of $5.1 billion, is that a good underlying estimate for average quarterly trend levels on a medium-term basis? Or do you think there will be headroom over that in a one to two-year timeframe under a similar oil macro condition? And then the second question is a bit challenging, I suppose is just when is a material difference a material difference worth flagging to investors and analysts? Because in January, you pre-announced due to a 40% difference for actual results versus consensus, and today, you've got a 44% peak to versus market estimates but no pre-results comment; and still very limited guidance from your Investor Relations. I am wondering how credible your guidance in quarterly statements is one month into each period when you've got a three-month period to talk about. I know you've commented on some of the two-quarter, second quarter operational trends, but how can you justify not putting in play at least full-period trading indicators like many of your peer group after the end of each quarter?

Thanks, Jason. I understand some of the frustration that might be out there in terms of leveling an estimate. The – almost by definition the 5.1 average is precisely what you stated is a good average in the underlying performance, however more importantly, we need to improve returns and we will grow, that’s the strategy. Therefore, it ought to do better over time, if we deliver the new projects. If we deliver the improvements in the old products business and if we continue to apply the activities across the shale portfolio including the upgrading the portfolio work, but those are the drivers of future performance, we expect growth and we expect better returns, so it should improve earnings of course comes with it. The next question is probably not quite so easy to answer and then. Yes, we interestingly we did some discussion, but one clear point first it’s not difference between earnings and estimates that would drive any decision on disclosure. And because of that sorry guys, will give too much credence to the estimates and what reason that the underlying rationale for announcing early in January was twofolds. One it was a break from trend, and not just a quarterly trend it’s a 12 month rolling trend. Because we have been at a $5 billion to $6 billion a quarter trend. We’ve had good quarters bad quarter not three consecutive quarters as we did in the back-end of the last year that were below that trend. That was the primary driver, the secondary driver was we work in a regulatory environment, which is particularly to say intense at the movement. There are regulator out there looking literally for few headlines and we’re not going to put our name in them. And the – we do you talked about…

Nine quarters actually, that is the last two, three year not months. Jason S. Kenney – Banco Santander SA: I mean that's due to better management. I mean this should have been in place three or four years ago. It was – to talk about things on a shorter-term basis and then tell us actually we've got to look at longer-term trends for quarterly results, it just seems a bit indifferent.

Yes, now and I do appreciate it. I’m tempted to offer you a quote because this is how it feel sometime, this is why you must look longer, but if want to be an executive in this industry, if you meet with triumph and disaster and treat those in past as the same and you have to do that. It is not a disaster in Q4, it is not a triumph in Q1, the long-term trends are beginning to move in our favor, but that does reflect long-term strategic intent. And yes, you can go back three, four years and say we should have been in a different position. Well, we weren’t. But that is good and it’s good in the sense that some of the improvements that we’re making come for free. We don’t have to invest to improve working capital or some of the improvements I talked about earlier in the downstream and you’ll see those delivered quarter-by-quarter in the success case. Jason S. Kenney – Banco Santander SA: Okay. Much appreciated.

Thanks, Jason. Good discussion by the way.

Thank you. The next question comes from Jon Rigby from UBS. Please go ahead. Jon Rigby – UBS Ltd.: Yes, thank you. Sorry. I was just still taken aback by hearing Rudyard Kipling quoted on an oil and gas call. Can I ask two questions, one of which actually is related to Jason's question? If we had looked at Q1 last year, I think we could have got over excited and then got horribly disappointed by Q3 and Q4. Can you just maybe go back through again, and it's a question I've asked a number of times around sort of various trends that impact single quarters? Are there things that we should be aware of that continue to affect Shell quarters that are positive in 1Q and perhaps 3Q, but less positive in 2Q and 4Q? And were those accentuated last year and won't recur this year? Or is likely to be underlying at a similar trend? Just so that we can start to consider where we are in your improvement; I take your point about looking at the long term. Just one other question. Just on Nigeria, I know you're in the process of making some on-shore disposals, when you come to look at that, are you looking purely at the consideration being offered, or are you also having to be aware of sort of your legacy responsibility for those assets moving forward? Even though that you're not obviously the owner, you bear some sort of residual responsibility potentially. Thanks.

Thanks. That’s a good point, Jon, that how can we help you better with this. And one thing is to say, it is a seasonal business somethings like tax payment, but also the gas business the volume demand is clearly higher in the winter in some parts of the world. And we do have quite a few other underlying issues; like some of the difference in exchange now is coming through from what the Australian to U.S. dollar on a quarterly basis is, $1 million to $200 million variance, which is becoming more predictable for us. And maybe we can help out there a little bit. But fundamentally things like, timing a dividend payment, sometimes we're not in control of that. So there's a limit to what we can do I think year-on-year quarters as an easier comparison than consecutive quarters, for that seasonality reason. And I think we should try and take that first – that into account to help you. Sorry the second question, could you just repeat. Jon Rigby – UBS Ltd.: Nigeria disposals. I was just wondering, because it looks to me that there's been quite a lot of bidders, but I guess that not all bidders are the same. Right?

They are helping quite a lot of bidders. We have over 20 serious bidding; mostly consortium with the Nigerian operator, often with overseas financial or operational backing. And there are some good players in that who could do a good job with the asset. I think we could come to a good commercial agreement what as slightly more challenging; and slightly more difficult to predict is how we can actually get the overall approvals across the whole of the stakeholder environment including the government. Because in previous transactions that has taken some time up to a year maybe and we’re also heading into a election in about a years time. And that can have an impact as well. And so difficult to predict outcomes but there are certainly some good player’s out there. Now it comes to sort of the ongoing liabilities the repetitional liability I think is impossible to divest. And clearly there is the terms of the sale aims to established baseline against which we carry no further liability if there are environmental or other issues after the point of sale. Can that then hold up in the future, it remains to be seen. It will always be difficult to detach the Shell name from some of the activities in the Delta. And we have eyes open on this – but the legal protection will be solid and it is agreed and signed off as part of the deal. And that’s about as good as we can get. And if you're such a student of literature, Jon, you might try the next two lines of the poem as well. But I won't quote them. Jon Rigby – UBS Ltd.: Thanks.

Thanks. Take the next question please.

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

Many thanks, it’s a good point, the reason where we are showing returns down a bit as by 2015, 2016 we still continuing to invest in Gorgon and Prelude and it won't have had much of an uptick. Well, it won’t have had any uptick in earnings in the earlier part of that period, so basically, the capital employed continues to grow there. We also have license expired, and so effectively it’s a small movement down that was projected forward, so there is a license expiry in Malaysia that we are not projecting to get extended. And beyond 2015 and 2016 Gorgon, Prelude will make very significant contributions. So will Elba Island. But hopefully, we will continue to invest in new projects such as Canada or Browse. So the basic point around the integrated gas positing in the March presentation was it is already highly profitable, it is already growing, and has grown fourfold in the past five years or so and we’ll continue to do so. It will be the core of Shell in the future and that’s basically is the message to take away, it may go up or down a little bit each year, but it will be very substantial part of Shell Group for decades to come. Michele della Vigna – Goldman Sachs International: And, Simon, sorry, if I may come back to that license expiry in Malaysia. Could you quantify, in case it doesn't get renewed, when the impact would come and how much it really would be?

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

Thanks.

Thank you. The next question comes from Lucas Herrmann from Deutsche Bank. Please go ahead. Lucas O. Herrmann – Deutsche Bank AG: Yes, Simon thanks very much. And I have to say, actually, reading back on your comments at Q1 in terms of the outlook, it's encouraging that you seem as poor at forecasting the quarter as we've evidently been, though don't for one moment take that as a comment that I'd like you to withdraw the commentary that you do give us to start with. Staying on the theme, I wondered if you could – is there any way you can bridge Q4 into Q1, and in particular in the upstream? I mean you very kindly bridged Q1 on Q1. I struggled evidently to understand quite why your numbers were as poor as they were last year, and I'm not sure that I've ever really understood. But perhaps it's easier for you to tell us how it is that in the upstream you delivered something like $2.5 billion in Q4 2013 relative to the $5.7 billion in Q1 of this year. Clearly, I can see $700 million depreciation. I can assume $300 million from Repsol. I can take $300 million from gas prices. But I'm still $2 billion out. And the production numbers are essentially the same. I know not all barrels are equal.

First of all we’re accurate in the operational statements we made; Lucas is you who derived the forecasting from them. Lucas O. Herrmann – Deutsche Bank AG: No. I'll just remind you, Simon. You say now – you made negative comments, and you said now I say that all against the fact that I delivered – that I think we delivered over $7 billion of earnings a year ago in the first quarter. I take that as an intimation that first quarter in 2013 was actually very good. But it's an observation; and you're right, it's interpretation as well.

Yes, couple of other bridges for you $500 million or so of exploration, which actually was much basically no tax shield in the fourth quarter, it’s still relatively high in the first quarter compared a year ago. The other bridge and this is a seasonal factor, so don’t take this the wrong way, but the trading activity in the first quarter is always higher than fourth. This is because markets are more volatile which may be because traders themselves are more active. In neither quarter was there a particularly big difference from expectation. In fact this quarter in 2014 in certainly old products was lower than it was a year ago, but it was certainly better than it was in Q4. But for only the case was it particularly unexpected but there is that element to seasonality it seem to first quarter is always a good one. I am not sure if I go down the pub for the entire fourth quarter, but I mean the industry as a whole it just there is less trading opportunity in the fourth quarter typically. Lucas O. Herrmann – Deutsche Bank AG: How big can that delta be?

It can be several $100 million if you do quarter on - for Q4 versus Q1 several $100 million there was a particularly attractive GAAP trading environment in both Europe and particularly North America in this year. And much more volatility basically so there are more opportunity to work in that market compared to a year-ago. So the gas trading was up year-on-year the oil trading was down the year on year both of them are much better than Q4. So that both things that helped. And then basically the fact that the less tax shield, almost no tax shield on the exploration expenses in Q4, which I think we did flag at the time. So exploration expense is quite a big contributor, the depreciation is one that does come through and takes a quite a bit of understanding even by us. So I will grant you that you, but there wasn’t changes on the discount rates or in the decommissioning and restoration so some effect, but that was more negative this year than it was last year. And the changes in unity neither, that you say as a result of proved reserve traditions at the end of 2013. All of which came out as we expect that may be done actually guiding a level of detail that would help me. But what you see now is more representative going forward, but the guys and all can help it to that one hopefully as not additional disclosure. Lucas O. Herrmann – Deutsche Bank AG: And just one follow-on from that. If I go back to your fabulous comet charts at the strategy day where I guess the intimation was 2015 to 2016 the Company should be capable of delivering broadly $50 billion or so of operating cash flow, simplistically, looking at what you're now – you describe as a more typical quarter, Q1, if I annualized to today's cash flow, you're already there. Now I know there's a seasonal bias, but how does – in the context of – does anything we've seen today, or anything you've delivered today, should it give us much greater confidence around the implicit guidance and indications you've given for the 2015/2016 years via those particular charts?

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

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

Thank you. The next question comes from Peter Hutton from RBC. Please go ahead. Peter Hutton – RBC Capital Markets: Good afternoon, thanks for the question. Moving away from the focus on Q1 versus Q4, etc., can I just take a step back on some of the longer term? And I think you are very clear in the reiteration that the key focus is the improvement in the ROCE, and of course, that can be done from two things. That's come from delivering improvements in profitability and also reducing the capital employed. How should we really be thinking in terms of balance of these drivers? When you're talking about balancing growth with returns, does that imply we should be thinking about half and half of -- the contribution coming from about half and half of those two drivers? That's the first question. And the second one is on organic CapEx. What's the optionality around the $35 billion organic CapEx that you've guided for 2014? If you are getting stronger cash flows, and I know it's very early days, but theoretically, if those cash flows are coming through more strongly, how should we think of the direction of those incremental cash flows between return to shareholders and improving or increasing your organic CapEx?

Good question. Peter I’ll come back to it when come back to that. Balance in growth and returns, you could get growth in the numerator and you can also improve returns by reducing the denominator. The capital employed is likely to continue to grow, I think we are investing at level much higher than our depreciation rates and we’re – fundamentally of divestment program is not going to be big enough to complete the reverse of that trend, it make it a bit sable for a period, but the improving returns have to come from growing the numerator of the earnings inline with the cash from operations. So that’s the primary driver. $35 billion optionality well either up or down was probably limited optionality, there is uncertainty though from the 2014 program, the uncertainty is two fold, one actually quite difficult and very specifically identify spend and the date at which it gets spent in a full year projects. There is always movement over here and there are also investment dollars associated with some of the assets, we intend to divest and Australia both the downstream and (indiscernible) were a good examples of that. So, the timing of some divestment actually divest investment if that makes sense. And so our aim is $35 billion organic for the year, our current expectation is hopefully $35 billion for this year. The actual outcome could be a little bit more or a little bit less depending on timing effects. The more important question, where is the prior of allocation of cash flow. I think Ben has been very clear and hopefully I reiterated also, until we demonstrate sustainable cash flows at the level with enable high level of investments that will be any high level of investment that’s far from clearly demonstrated we need not just for our end purposes, but with equity on that markets results to earn the license to invest and to deliver the strategy going forward, but we need to see further and more sustainable cash flow generation before we talk about anything beyond 35 which means the first priority on the additional cash flow obviously dividend it is managing the balance sheet always good to have a flexible balance sheet and if it’s a buyer market and it will be buybacks as and when we can do that in the economically efficient way. Peter Hutton – RBC Capital Markets: Excellent, thanks a lot.

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

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

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

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