Shell plc (SHEL) Earnings Call Transcript

Welcome, everyone, to our webcast of enhanced quarterly disclosures. My name is Tjerk Huysinga, and I'm the Executive Vice President for Investor Relations at Shell. Today, my colleagues and I will provide you with more details on our new disclosures, which we presented together with the Q1 2021 results. So our industry is evolving. The Shell of today is less of an old company than it was a decade ago. And in a decade from now, that will change even more. As we transform, we have set on a journey to enhance our disclosures and improve transparency for some time now. In the third quarter 2019, we introduced the quarterly update note. A few quarters thereafter, we issued our quarterly press release. And during our most recent announced results announcement, we presented you with our updated quarterly data book. We've received positive feedback from many of you, and appreciate our ongoing dialogue because it's extremely important for us to know what new data points the market is looking for. So recognizing the significance of our update strategy as well as the valuable feedback collected from you, we have worked to provide additional elements as well as more granularity in the key financial numbers of our business segments. We hope this will facilitate further understanding of the businesses and their parts as well as help modeling them. I would also like to highlight that starting from Q1 2022, we will also update our business segments reporting to align them with our strategic business pillars, while giving enough granularity for better modeling purposes. You may have seen there are many new disclosures and details in the quarterly data book. Amongst these, I would like to highlight a few and our thinking behind them. First, to improve the performance visibility of our business segments, we are now providing full reconciliation from adjusted earnings to EBITDA to free cash flow for each business. These breakdowns will detail the effects various material items, such as taxation, derivatives or divestments. Also given the significance of our ambitions in the growth pillar, you can now see some full income statements of retail and lubricants. It shows how material, resilient and profitable these businesses are, which we recognize, it could have been difficult for you to fully appreciate previously. In Upstreaming, we are adding some more granularity for estimating the business performance going forward. We are also aiming to address one of the biggest challenges faced by investors and analysts when modeling our integrated gas and upstream business separately. We are providing additional cash sensitivities for each of the businesses, separate realized prices and regional production details. These should help investors and analysts to move away from the FAS 69 disclosures in our 20-F, which we believe is not suitable for modeling purposes. In Integrated Gas, we share more guidance such as the price exposure of our production and the contractual structure of our LNG sales. And finally, I would like to highlight our disclosures on the indicative refining margin for more accurate estimation of the performance of this business. With that, we shall move to the Q&A part of our session. Let me now first introduce you to the finance leadership of our different businesses, who will be answering your questions today. On the call, we've got Sinead Gorman, our Executive Vice President Finance for Upstream; Frank Lemmink, our Executive Vice President Finance for Integrated Gas, Renewables and Energy Solutions; Brian Eggleston, Executive Vice President Downstream; and Roland Ilube, Senior Vice President Finance Mobility. As ever, you can ask questions on the line. Alternatively, if you prefer, you can also e-mail me directly your questions, which I will then read. With that, let us take our first question. Cassy, maybe you can explain to people how to ask questions, and then we move from there.

[Operator Instructions] We have the first question from Irene Himona with Societe General.

I had 2 questions. So firstly, thank you for the enhanced sensitivities you provide. I would not presume these apply to annual changes? And I would also presume they apply to relatively small movements in prices and margin? Any advice you can provide on how perhaps we should be risking the sensitivities when we look at quarterly forecasts? Or indeed, periods like 2020 when price and margin moves are extremely large and volatile? So that was my first question. My second question, it's more specific to Integrated Gas & Chemicals, I guess, where the contribution of earnings from associates and JVs is quite substantial, 25% to 30%.

Sinead, do you want to go first?

Thank you for the question. I mean, you're right, there is some difficulty, of course, when you're looking at numbers in terms of sensitivities over a quarterly or a smaller perspective versus annual. So of course, the information that we provided, particularly around FAS 69 or about supplementary and for the annual report is not so great for the modeling side of things because it combines a lot of things together in both Upstream and IG in terms of really focusing on the E&P side of things, but also it's very specific to the SEC rules. It also doesn't include some of those allocations that you see, both from trading and the upstream. But also, of course, on the IG side, and this is like some of the midstream and the LNG sales. And of course, it focuses on the headline numbers. So it just creates more distortions in your models, of course. And that's why I'd really suggest you look at the quarterly data book, which has this complete financial split type for both Upstream and IG and mix is a little bit cleaner to be able to look at what are the unusual or what has happened specifically in the quarter. So the other thing I would say, of course, is, as you say, some of these elements need to play out over the course of the year and the rule of thumb is a case in point. But of course, it's not great when you look at it specific for one quarter, but over the average of the year, it really tends to apply over that longer period is helpful.

Yes. So let me say a few things about joint ventures and associates. When it comes to the production and liquefaction of joint ventures, they are included in the additional disclosures we now make on production by region and liquefaction by region, so you can find it there. But at least in the financials, the revenues you find in a separate line, the share of profit of joint ventures and associates. And the best way to model, I would say, is just to look at the trend over time, and this should be a relatively strong link with the price markets that you see in the market. And that's the way I would incorporate it in the models. Roland?

And then for chemicals, maybe just to be a little bit specific. We've got a number of joint ventures in there, but I could say the 2 primary ones, one is of course the Nanhai facility in China, and the other one is our Infineum business, which is a lubricant additives business. So fundamentally different profiles in those, whereas Nanhai is more exposed to traditional chemicals market, is similar to what Frank was just saying in terms of using the normal outlooks in the Chemicals business. Infineum, again, being a primary additive in the specialty high-end lubricants is where the target is. It's going to be more ratable and more akin to the lubricants business perspective. So that would be the best I could give you on that one, Irene. It's a good question.

Our next question comes from Oswald Clint with Bernstein.

Actually, Oswald has just dropped me an e-mail. He said that he came off the line, so I'll read his question. So Sinead and Frank, why is there a delta between earnings and cash flow sensitivity to $10 per Brent? It's so large in Upstream relatively to IG, first question. And then for Frank, how do we think about power in the IG tap? 250 terawatt hours to 560 terawatt hours this decade. We don't have gigawatts or ownership of projects for Shell. So how should we think about the impact on your IG tap with revenues, third-party purchases off balance sheet financing and repayments? Then he's got a last question, which I'll ask later. So maybe first, we go to Sinead on the delta between earnings and cash flow sensitivity of the $10 barrel Brent. Why is it margin Upstream relatively to IG? And then Frank can add to it, and then I'll repeat the other questions.

Preference on that guidance as well, so you'll see in the recent quarter guidance, we've tried to provide a bit more detail in terms of the tax per quarter coming through.

Well, Sinead, just for clarification, Sinead used the word Quan, that basically meant, it's sometimes we use that internally. It's the quarterly update note, which is the sort of what we call it a market trading statement, which we have -- we issue it every -- now every quarter at the end of the month, so just that people know what we're talking about. No, that's just adding to people who are aware of what we're talking about. No worries about it. Frank, over to you.

Yes. So not much I can add to that, and the difference will be fiscal and tax related. Let me talk a little bit about power or in the broader sense, Renewables and Energy Solutions. Currently, still completely integrated in our reporting on Integrated Gas, Renewables and Energy Solutions, which will change over time. As you rightly say, we have enormous ambitions in the Renewables and Energy Solutions business, growing to 560 terawatt hours by 2030, growing our customer base to 15 million, and then when we will require a lot of investments. So investments will ramp up to roughly $2 billion this year and will grow further in the years to come. We will combine that with third-party capital to further grow our business across the full spectrum of Integrated Power and also the Energy Solutions. So full spectrum, I mean from generation to trading to ultimately customer solutions. And so our balance sheet will show a significant change over the years to come, which is also the primary reason that we've decided from 2022 onwards to start reporting Renewables and Energy Solutions as a separate segment. So you can expect that to be coming from next year onwards. In the meantime, of course, we will continue to provide you with updates on the progress we made in building up our portfolio and adding to our customer base.

Thanks, Frank. And I think I had the last question here, which I didn't read yet, but it's for Roland. It is the last question from -- here from Oswald. Your retail lubricants are marketing split, and that has a tap, which is called other, including -- is this including aviation, bitumen, biofuels, Shell Midstream? Can you explain please what's in that other, Roland?

Thank you, Tjerk, indeed. So as you've identified, our marketing business, we have broken out the P&L in detail, and then we have gone further to detail out the retail business and the lubricants business, which, if you like, are very much self-contained, stand-alone businesses, which you can compare to sort of the pure-play analogs. We have a number of other businesses in our marketing portfolio, which we haven't combined because they have different characteristics, and you've identified the main ones there indeed. We have a pipelines business predominantly in the United States. We have a global aviation business, and we have a global specialties business, which is bitumen and sulfur primarily. And also included in that we have our share of results relating to our joint venture in Brazil, the Raizen joint venture. So it is a combination of that portfolio of activities, which principally you see represented in that other segment.

Your next question comes from Jon Rigby with UBS.

A few questions actually. The first is, can you just explain to me why FAS 69 isn't useful? We've used it for years. It's a very straightforward way of comparing between companies and your peers and comparing performance and trends, et cetera. So I just wonder why? Why it is that we can't use that as a base to think about the businesses? That's my first question. Second is on Integrated Gas, it seems to me is that the key issue and question that we have is trying to understand the sort of ratable business, which is your LNG manufacturing and selling arm, which is fairly steady, but with price, obviously, sort of gearing, which we can take off or sort of contract? And then does the trading optimization business, is there -- half of that business is inherited or taken from BG, and BG used to have quite an enhanced disclosure around that sort of with sourcing and end markets, so we could get some idea of how the spreads were being captured and how that was moving around. And is there some consideration of looking at that? Because I think that would be an area where I think it would be quite useful in understanding that business, particularly, I think, in the context of the last couple of quarters? And my third question is you've got a lot of -- in the strategy, you've talked a lot about the nonfuel retail aspirations and the way that Downstream business is going to change in a way that it engages with customers. Is there some sort of plan to sort of expand disclosures and discussion around that going forward?

Thanks, Jon. If we go over like this, so Sinead, why don't you start with FAS 69. You already explained it a bit, but maybe just add to that, and because it's an extremely important question and very relevant from that point of view. LNG trading and optimization, Frank. And strategy in nonfuel retail is for you Roland. Okay. Sinead, do you want to go first?

Sure. And thanks, Jon. And I know I recognized certainly approached a lot more on this at the end of the day. But the way certainly, I look at this, and we frame it is we, of course, have looked to separate out our businesses. So we have Upstream and IG going separately. And I realize that's not the same as you have, of course, with some of the other IOCs, which, of course, you're comparing us to in you're modeling as well, so that is a bit of a difference from my perspective. But what that does mean, of course, is that the way FAS 69 shows it is it shows it together, it combines both Upstream and IG together. What we've seen just in terms of the own specificities of our businesses, both Upstream and IG, is that there are differences. We see particularly that and you see it on realized price, you see it on a number of different elements. But also, of course, as you move towards the IG side of the business, particularly, you see that FAS 69 doesn't incorporate everything in terms of, as you know, some of the midstream elements and the LNG sales. But also it's very much linked to the SEC rules. So it gives you that data. I assume that for some, that doesn't really make much of a difference. For us, it does, and that's why we've chosen to make sure that we guide in terms of showing both the Upstream elements and the IG.

Sinead, I'll take over here. Yes, so Jon, let me pick it up from there basically because as you rightly say, the key issue with FAS 69 is that we can move properly separate, the IG business. And it does not allow you to model the IG business to its full extent, and it includes trading and optimization. And so maybe a few things. And I don't know if anybody can pull Slide 26 up from the back because that's probably a useful one to talk through and to just point to a few elements that we're trying to do here. So first of all, the IG business, we have 3 important components. It's the equity production for which we disclosed both production by week, and we also disclose the realized price for that, so you should be able to model that properly. The second component is the LNG from our Midstream-only assets. And the third component is the margin we realized on our third-party supply sales, which we also disclosed as part of the overall sales -- LNG sales volumes. Those are the 3 components. And what we try to demonstrate, particularly in this slide is that, on the back of those 3 components, where we generate a pretty stable, structural and stable adjusted earnings stream. So what excites me over here in terms of disclosures and to help you with your model, first of all, we look at our equity production and break it down in the gas and liquids components, and then further break down gas into its constituent parts, pipeline, TTL and, of course, the most important part, LNG. And we leave that to the relevant markets that we see in the market. So clearly, pipeline gas is subject to local gas sales agreements mostly and domestic gas structures that we need to follow. So that is very specific and GTL and liquids is mostly exposed to Brent. LNG 6 -- we got 2/3 to 75% exposed mainly to GCC minus 3 and roughly 1/3, 25% to 35% to JPM more short term. So when you take those markets and you then run correlations, you can see that actually, there's a very strong correlation between those markets and the realized prices for liquids and gas. And in turn, those realized prices are a pretty good predictor of our adjusted earnings. They're not perfect because, as I said, the equity production is one component of our total business, and you have the midstream, LNG and you have the third-party supply, all of which we use to fulfill our customer obligations as per our long-term and spot contracts. And of course, we realize trading and optimization margin on top of that and using our global scale and using the volatility in the market. So you see some deviation in the adjusted earnings graph. Most of the deviation is actually related to specific items, events like writeoffs or tax adjustments. But a component of that is also the variation in trading and optimization that you see from quarter to quarter. But these are not as large as you would expect. And when we expect a significant variation in the results from trading and optimization, you can expect us to guide you on that in the quarterly update call, as we just discussed. As we discussed, these are some of the elements that I think will help you to model our business productivity. Then in addition to that, in the data book, we also give you the split between spot contracts and term contracts where you actually see that most of our contracts are term contracts of a long-term nature. So there is -- just to underpin the structural and stable character of our earnings. And we also give you the split between Shell marketed volumes and joint venture marketed volumes. And finally, to give you information that's roughly 20% of our term contracts are really up for renewable in the next 3 years, again, to underpin the stability of that part of our business. So I expect that, in its totality, these data will give you -- will be able to -- will give you the opportunity to model our business properly and understand the component parts and that supports the structural nature of our business.

Thanks, Frank. And Jon, the slide we show here is Slide 26 in the Q1 pack. And what Frank was referring to for everyone on the call is in the data book, it's Page 29, which gives all these data is in the table, and we will disclose on a yearly basis. Let's go now to Roland on the last question from Jon.

Indeed. And as you said, Jon, the NFR part of our portfolio is indeed a key part of the strategy that we are pursuing for growing our marketing businesses between now and on our sites, through to sites where we have more of a wholesale model and some which are under what we call a licensed market agreement. And the way that we earn revenues varies depending upon the operating model. So whereas for some of those, it's very easy to say, this is the contribution of the earnings that we get from those sites, which is directly related to our nonfuel retail business. But rather, it's not quite such a direct link. What we wanted to do in this disclosure that we've done this quarter is enable people to follow very clearly through the lines of the financials statement what the different elements are and try not to confuse matters by sort of creating a separate or sort of related set of financial disclosures. But we are continuing to look at how we can give a bit more insight into the drivers of margin and profit in the marketing businesses in a way which is consistent and makes sense.

[Operator Instructions] I have our next question from Lydia Rainforth With Barclays.

But just coming back to that FAS 69 side, one of the advantages of it was always the sort of geographic breakdown. And I'm just wondering it does feel like we've lost a little bit of -- with the -- without -- if we're trying to model it without using geographic breakdown from FAS 69, that becomes a little bit more difficult. So just wanted to know your thoughts on just the idea of -- is the idea that we could keep the modeling very simple and relatively high level seems to be kind of what we're getting from the data? And then secondly, on the -- just on the oil product side and just make sure that I'm understanding this question correctly, that indicative refining margin, and I appreciate it is any indicative, is the idea that if I take that multiplied by the refinery processing intake, that gets me to the indicative EBITDA and then the difference between the EBITDA reported and the -- and that number would be the trading number?

Thanks, Lydia. SInead, maybe you start again. You start to be getting the FAS 69 expert, but I think it's a completely valid question. And again, we need to be very clear on that. So maybe you want to start with FAS 69. And then Brian, we move to you on the indicative refining margin. Sinead?

No, happy to. Good afternoon, Lydia. You're right in the sense that so what we have, of course, still got is we have the geographical breakdown for production. So that's still there, and that is outlined quite clearly. It's also very useful frankly when you look at it to be able to see some of the progress as you see us in certain production, particularly as we move through some of the things that we've highlighted in strategy days and so on, so related to the core principles of lean, et cetera, and it starts to play out and you can see the variety of volumes coming through. Of course, as we've discussed before, not all volumes are equal and it's very much by value. When you start to see some of the regional differences, understand different fiscal models and different type of earnings, et cetera, coming through, it's just simply easier to aggregate it and put other P&L lines together. So that's what we focus on that. And of course, in the course of the update note, not the Quan, of course, we already did, we see it coming through and some of the elements where we're providing the guidance around tax depreciation, et cetera, which just allow you to model that so much better at the aggregate, breaking that down to some of the specifics around, say, tax, et cetera, for the different regions or geographical breakdown doesn't really help much, some of the timing effect that offset. There's so many difference of those variations, which is why we really steer towards the aggregate. And that's really partly why we've, of course, got the new disclosure really with the adjusted P&L and outline as well. I hope that helps better. I'm sorry, whom I handing over to Tjerk?

Handing over to Brian, and Brian will talk about the indicative refining margin. Brian, over to you.

Simplify the formula, believe it or not, this is the simplified version of the formula that picks up on these external market indicators that you can get and will allow you to model this and basically brings the complexity of how our refineries are configured, the crudes we run, considering the flexibility we have and the products we make in general, to bring that and boil all that down into a single number that we can guide on. And then of course, you've got the rules of thumb that we talked about earlier in terms of how that impacts the income. So hopefully, that's a helpful thing for us because, again, it's something we talk about internally. And now we can communicate with you very transparently and, again, a single number on where the margin gets -- where the margin part of that business, which again is the revenue less the purchases is where that's headed.

Okay. Thanks, Brian and Frank, Sinead. I just got an e-mail in as well and Brian, this one is for you, and then we go to Sinead. One is in chemicals and intermediates. The question is, your results in chemicals in the first quarter tell me that this business is becoming much more material for Shell. Can you help me understand your chemicals business? And particularly how, I understand the role of intermediates. So that's a question for you. And then for Sinead, thank you for these new disclosures. But I'm now noticing you've included underlift and overlift in the Upstream stat. Can you talk me through this disclosure? So first, we go to Brian, and then we go to Sinead.

Yes. So thanks, Tjerk. Yes. So Chemicals, indeed becoming a bigger part of our business, consistent with our strategy for that part of the business. So in Q1, $730 million of earnings and roughly $1 billion of EBITDA, so it was a material contribution to the group. And it's really underpinned by a few things. I'd say, first of all, is the -- there was a market tailwind in the first quarter to deal with the Texas freeze and availability of product. And one of the keys in this business is, of course, to be running when the market is good. So that's always we focus on our reliability and our utilization to ensure that that's the case, which was the case in Q1. But I think more fundamentally than that, it's a shift -- a purposeful shift as part of our strategy towards a more performance product-oriented Chemicals business and the intermediates. So as we diverse -- or as we move down the value chain from base chemicals to intermediates toward performance products, we'll see a couple of effects on our financials going forward. The first one is think of that as a spectrum from a pure commodity to a product that's priced at a value and use. We're moving -- we're purposely moving on that spectrum for the value we use. It's very much like lubricants. If we can demonstrate the value that our product has to a customer, if it reduces their -- or gives them a few better fuel economy by 5%, people are willing to pay that extra margin because they see that benefit come. So it's about paying for the value that the customer gets from that product. So that's where we're moving in, in that. So -- and by divorcing ourselves -- not divorcing ourselves, but minimizing our exposure to the commodity cycle by being more about the customer's value, what it does is it does 2 things. It lifts the overall earnings and it reduces the volatility in the earnings of the Chemicals business. And so that's the strategy. That's what we -- I think you've embarked on with our AO4 project that came online a couple of years ago. And more importantly, of course, our Pennsylvania project, which we'll have a good exposure to this more differentiated into the segment that I'm talking about. So hopefully, that helps explain a little bit what's going on with intermediates.