Shell plc (SHEL) Earnings Call Transcript

Hello, everyone. I'm Andrew Mackenzie, I'm Chair of the Board of Royal Dutch Shell. Today, the Board announced a proposal to amend Shell's Articles of Association. This will simplify the company's share structure and bring it in line with other companies so as to increase its capital and portfolio flexibility. The simplification will make Shell more competitive. It will allow for an acceleration in shareholder distributions and speed up Shell's transition to a net 0 emissions energy business. Under the proposal, Shell intends to change its A/B share structure to a single line of shares, and to change its tax residence to the U.K., which is our country of incorporation. It will hold Board and executive committee meetings in the U.K. and relocate its Chief Executive and Chief Financial Officers there. As a consequence, the Board also proposes to change the company name from Royal Dutch Shell plc to Shell plc. But some things will remain unchanged. Post simplification, shareholders retain the same legal ownership voting and capital distribution rights in Shell as they do today. And the company's shares will continue to be listed in Amsterdam, London and New York, with FTSE U.K. index inclusion, and we expect that AEX index inclusion will be maintained. Shell's corporate governance structure will also remain unchanged, and the simplification will have no impact on legal proceedings related to the Dutch court ruling. Shell is rising to meet the court's challenge and has recently have a new absolute emissions reduction target. At a time of unprecedented change for the industry, it's even more important that we have an increased ability to accelerate the transition to a lower carbon global energy system. This simple structure will cause Shell to accelerate the delivery of its Powering Progress strategy, while creating value for shareholders, customers and wider society. The Board believes the proposal is in the best interest of the company and shareholders as a whole, and that the benefits of the simplification will outweigh any potential costs associated with it. The Board has called for a general meeting on December 10, 2021, at which the resolution to amend Shell's articles of association will be put to a vote. Your support is extremely important to us. The Board and I strongly recommend that Shell's shareholders vote in favor of the simplification. Thank you.

Welcome to the shareholder Q&A session hosted by Royal Dutch Shell. Today's session is being recorded. [Operator Instructions] I would now like to introduce the host of the session, Sir Andrew Mackenzie.

Thank you, Allan. Ladies and gentlemen, good afternoon, good morning, and thank you for joining us today at such short notice. My name is Andrew MacKenzie, and I am Chair of the Board of Royal Dutch Shell plc. And I'm joined today by Ben Van Beurden, Shell's Chief Executive Officer; and Jessica Uhl, our Chief Financial Officer. In this 1-hour session, we hope to address your questions on the simplification proposal that the Board has announced today. The proposal will enable Shell to change its dual A/B share structure to a single line of shares and its tax residence to the U.K., which is its country of incorporation. The simplification is designed to make Shell more competitive, to accelerate distributions to its shareholders and to speed up its transition to a net 0 emissions energy company. Your board believes that the proposal is in the best interest of shareholders, and we strongly recommend shareholders to vote in favor of the changes to Shell's articles. With this short introduction, let us now move on to your questions. So please, could we just have 1 or 2 each, so everybody has an opportunity. And with that, could I have the first question, please? Allan? Thank you.

[Operator Instructions] We'll take our first question from Biraj Borkhataria with RBC.

Two, please. The first one is under the new structure with 1 share class, I remember speaking to Ben at one of the events and you said you wouldn't consider a Dutch auction for the Permian proceeds and the way that will be returned to shareholders. Given that you're moving to 1 share class, is that -- does that now come back on the table? That would be the first question. And then the second question is around portfolio change. In one of your points, you mentioned that this would allow you to manage your portfolio with greater agility. But looking back a few years ago, you did the BG deal with the dual share class. And so it can be done without that. I was just wondering if you could go into a bit more detail on the advantages of having that single share class? And what that means for how quickly you can buy or sell assets?

Well, I think what I'll do is I'll ask Ben to handle the first question, given that you've already had a conversation with him. I think in terms of portfolio actions, it's clear with the new structure that we will be able to consider a much wider range of options with a single line of shares. And perhaps, Jessica, you might want to add to that and then Ben.

Okay. So Biraj, thank you for your question. And you referred to the BG transaction and how we were able to affect that transaction in the current construct. And indeed, we were able to do so, but it required us to engage with the Dutch government beforehand. And so it wasn't -- it's not necessarily the most efficient or effective process in terms of achieving the outcome. That's one piece of it. In order to effect the transaction, we had to put it within the dam structure. That dam structure then has knock-on effects in terms of how dividends are used within that construct in terms of paying our ultimate shareholders. So both in terms of our capacity to do the transaction, the current construct is not efficient. We were able to work around it. But we think in this day and age where the pace of the energy transition is happening quite quickly, things that require us to find workarounds is not really the most competitive starting position for us. So we believe making this change puts us on equal footing with our peers, and takes away the constraints that are currently in place that require us to engage with the Dutch government in order to effect these transactions. And then once those transactions take place, remove the constraints with respect to how we actually structure the company and how dividends flow within the company going forward. Ben?

Yes. Thanks very much. Thanks, Biraj, for your question. And indeed, I do remember you asking that before. But first of all, we haven't, of course, formally decided how to return these proceeds to shareholders. We will decide and announce that once we have the money. But the other thing I would say at this point in time already is that you have to bear in mind that auctions are not always successful. And you may therefore not be able to fully return everything in that particular auction. And our intention is very clear, we want to return the full $7 billion. So we'll have to consider exactly how we do it. But I think it's fair to say that the full position that we are starting off with is share buybacks.

The next question will be from Oswald Clint with Bernstein.

Yes, perhaps as a follow-on question from that, the point about agility. The other point about speed of change and the unprecedented speed that things are happening. I was just curious, as we put those together, if you talk about, is there anything you think you've missed here? Or you kind of regret not being able to put into the portfolio over the last couple of years? Anything you really need to position yourselves more strongly looking forward? And mostly related to the kind of low carbon business, please? And then perhaps, if we could just ask perhaps Jessica, just to confirm or just talk about how solid these -- the income tax payable back into the Netherlands, is it 0 to $0.4 billion? Is that a good, solid, robust number at this point?

Okay. Look, I've only been here for a short period of time. And perhaps Ben would like to discuss the last 2 years about some of the things that we may have done differently. But I do believe, though, that with what we've done in the more recent past in introducing our Powering Progress strategy, in simplifying or reshaping our organization that what we now have is a simplification of the financial structure so that we can go faster and can go more agile. And I think ways that many of you can imagine, but Ben maybe some specifics, and then over to Jessica.

Yes. Thanks very much, Oswald. I think it would not be appropriate to look back and say what are the things we didn't do because we didn't have the agility in our financial structure. It -- I think that would not be a useful way of looking at it. I think it's more important to look forward. I think we can all see that we have to go faster. Everybody will have to go faster. We will have to perhaps change some of the structure in our portfolio, maybe we'll have to acquire, maybe we have to sell, maybe we have to do creative constructs also from a funding perspective in different parts of our business. And all of that at some point in time is going to have a bearing on this complicated financial structure that we have and will limit our options. I think it would be too far to say, and you probably would have known it, had we said, listen, here we lost a particular transaction because our share class structure was somehow acting against us. But the fact that we have the limitation, I think, is enough for us to want to eliminate it. It's a Dutch saying, you better hurry when you have time, so that you have time when you have to hurry and that's a little bit of what's going on here as well. Jessica?

Indeed, it's about taking action when you can, not necessarily when you need to. And this is really about setting this up to succeed going forward. In terms of the tax question, Oswald, the tax is a corporate income tax that will become due when -- should shareholders support this, and the Board decides to move forward. When we execute the move, this tax would become payable. It's clear in terms of Dutch tax law that, that is payable. The exact calculation of it is less defined. We've hired a number of external advisers and have reviewed this both internally and externally over several months, and I believe it is a very robust number in terms of the expected outcome.

Thank you, Jessica. Can we have the next question, please?

Your next question, yes, sir, will come from Roger Read with Wells Fargo.

Yes. Thank you. And simplification, we always like simplification here on the sell side, so thanks for that. But the real question I have is, I think from what you said so far was in the press release, it's all about, I guess, flexibility and speed. So can you give us an idea at all of maybe a time line of what sort of improvement in timeliness or speed you would anticipate versus what you were or maybe I should say, currently are dealing with?

Well, I mean, I guess our best time line that we've already mentioned. I think particularly in some of our recent results has been our ability to return money to shareholders through buybacks. And that was something that -- with a single line of shares, we could -- if we consider this is the right way to return the proceeds of the sale of the Permian to the shareholder through buybacks. We could actually do that quite a bit quicker if we were operating just for a single line of shares with the new structure that has been proposed today as opposed to the old structure. I don't know if there's anything you want to add to Jessica.

So indeed, there's a number of different constraints that are on us that we're looking to remove that would improve kind of the tools that we have at hand with respect to our capital structure and our corporate structure. So on the capital side, it's in relation to potentially issuing capital, where we have constraints in terms of our ability to issue B shares at the moment. It's also on the side of distributing to our shareholders and facilitating that in terms of the quantum of share buybacks we can do and the pace at which we can do it at the potential cost of doing it. All of that improves with this proposal. On the corporate side, we then have more flexibility in terms of how we want to organize the company, how we want to shape the portfolio. I think this part of our current construct is probably less known or understood in the marketplace. But tied to the A and B shares is a very static structure in terms of how dividends are paid. And in this day and age, we want things to be more dynamic, and we want to be fully in control of how we structure our portfolio. Today, we can't do that. So whether it is spinning off a portion of the business, if it's selling a portion of the business, we have dividend flow considerations to take into consideration, which isn't typical for a company. And again, we want to remove those constraints so that we can simply focus on the business at hand rather than on some of these administrative issues that currently -- that would get in the way going forward.

Let me just ask one follow-up on that. When you talk about a better way to pay dividends or maybe a more simplified structure, is there a savings number we should think about as synergy number here? Maybe, ultimately, a different corporate structure of the company that reduces overhead costs? Is there any of that is a possibility?

So Roger, I think the -- it's fair to say those possibilities exist. We didn't need -- we didn't use a number to make this decision. It's really about creating the capacity and the ability to effect change, whatever that change may be and be able to do it at pace and be able to do it on our own terms. So it's really about the ability for the company to act quickly and to make those types of choices in the future without having to engage with the government counterpart in order to make that be true or to be constrained by some of these unique elements of our structure that certainly provide no benefit. And we strongly believe by removing those constraints, it gives us more degrees of freedom, more tools in the toolkit in terms of affecting whatever change we may want to make from a capital perspective or a corporate perspective.

Thanks, Jessica. Look, I mean I too am a great fan of simplification. And in my experience, many of the things that Jessica has spoken about, the things that you've mentioned as possibilities are all things that will add to savings, if you like, or greater value creation in the future. Sometimes hard to be precise exactly where they will come from. But simplification does undoubtedly make companies better. So maybe have the next question, please?

We'll next go to Jon Rigby with UBS.

Two questions, please. The first is, I guess, this kind of raises an issue of the capital structure for stock because the CFFO number drives a potential share buyback number, which fairly clearly with the Permian was not achievable with the previous or not achievable economically with the previous structure. But we're focused on the structure, but it also sort of suggests that -- or the question is, is this layout of the strategy and the CFFO calculation that drives the buyback, does that work in $80-plus oil markets? Does the split between balance sheet, buyback, CapEx, and then I guess the choice around additional CapEx, does that still hold as oil prices move significantly above, I guess, where you would have envisaged they were when you set out Powering Progress? That's my first question. The second one is in the last quarter or so is that having sort of pushed back quite hard on the Dutch court ruling around your emissions outlook, is that you're able to come up with a new plan or sort of an evolution of the plan, which actually basically addressed those quite ambitious or quite aggressive emissions reductions. And you said you could do it within effectively the financial plan with the financial outcomes, et cetera. And right now, after sort of 15 years of this sort of temporary A/B structure, you've announced a consolidation, which, if I understand it correctly, it could be done within 3 months. So the question is, is internally, within Shell, has there been a sort of block about doing these quite big decisions and changes which seems structural and seem very difficult to do. But actually, as it turns out, with a bit of ambition, you can do quite significant changes to the way that you do business quite quickly.

Okay. Well, I mean, there's a number of questions in there. And I mean, of course, any company which wants to win the support of its shareholders has to be hugely committed to a steady improvement in all the ways in which it operates. And I think in what you've seen in Shell, you see that remorselessly that we continue to improve our business to improve the way in which we handle our emissions to the environment. And we continue to update you on that as part of the continuous improvement journey. So of course, we can do lots within the existing structure. And we would have done lots and we will do lots. But of course, we can do so much more if we have a better, freer and more liberating structure. I think on the issue of, if you like, the capital allocation framework and whether it is fit for purpose through our ports -- parts in the cycle. Well, the Board have discussed that comprehensively. And we have tested it against models through all parts of the cycle, including high oil price. And we do believe it has a sort of medium-term solidity to it that we want to follow through all parts of the cycle, and that's what you've seen in the way we've chosen the allocations between capital through distributions to shareholders and to the balance sheet. I don't know, Jessica, if there's anything you want to add to that?

So Andrew, I think you said that well. I believe the framework is robust and is serving us well and will continue to serve us well. Of course, this very strong macro environment, the cash capacity of the company grows materially. You've seen that last quarter. And at those levels, it certainly gives us more flexibility in terms of where we land on that range. And I think what -- I would put that in the category of a good problem to solve. But overall, I think the nature of how we've structured the financial framework and the allocation process serves us well, and I think will serve our shareholders well.

Next, we'll go to Michele Della Vigna with Goldman Sachs.

Sir Andrew, Ben and Jessica, congratulations on such an important simplification of your corporate structure. I had 2 questions, if I may. The first one is about your key divisions, which will remain centered in Holland E&P project delivery and integrated gas. I was wondering does it still make sense to keep the center of those divisions there when the country, I think, especially through the court ruling has proven to be not necessarily one of the most friendly places to do business as an energy company. And then secondly, I was wondering if the tax domicile change to the U.K. could materially impact your tax rate outlook? Or is really that ends up being any material effect?

Well, thanks, Michele. And maybe I'll take the first question, and then I'll ask Jessica to take the second question. Netherlands still remains a great place for Shell to do business. We've shown this very, I think, strongly over the last couple of years. We've committed to invest nearly EUR 4 billion, primarily in the energy transition. And we do see Netherlands as a place where we can actually demonstrate what's possible in the energy transition, certainly for the country, but also, I think, in the way in which we can -- with the Netherlands show leadership to Europe and indeed to the rest of the world. So I wouldn't consider this decision to be in any way a vote in the opposite direction. Quite the opposite. Our commitment to the Netherlands remains strong, and it will remain strong, and it makes perfect sense given all of that, that we would base many parts of the fundamental business of Shell in a global sense here in the Netherlands. The businesses that you spoke about, along with a lot of activities in research and development, which are part, if you like, of the projects and technology group. We are clear on that. This is an adjustment to improve our financial efficiency, which involves the movement of a relatively small number of people to London and the holding of Board meetings and executive committee meetings there. But in many other respects, our commitment and our presence in the Netherlands is unchanged by that, and we will want to continue to build on that because there are many insights that we get here that we think have been valuable for the long history of Shell and will be valuable and remain so for many decades to come. But Jessica, maybe you might want to add a bit more to the second question.

Good. So Michele, in terms of the expectations around tax, we do not expect this move to have any material impact in terms of our effective tax rate. In relation to this move itself, our tax rate is a function of the nature of our business, the location of our profits and the mix of our business. That's really what drives the tax rate and this move from a tax domicile perspective for the corporation should not have a material impact in and of itself.

We'll go next to Martijn Rats with Morgan Stanley.

Yes. I have 2, if I may. First of all, just sort of from a practical perspective, are there any sort of milestones, key dates that we should be looking out for? I recognize, of course, that December 10 is an important moment. But thereafter, what are the sort of key milestones? And roughly, how long will this take from sort of practical point of view? And the second question I want to ask, which is slightly off topic, but we just finished COP26 and now that we've got you, I can't resist the opportunity to simply ask Ben, who wrote an eloquent article on LinkedIn about what you hope to expect from COP26. If he could perhaps share a few words and thoughts on how they eventually met or did not meet those expectations?

Okay. Thanks, Martijn. And I'll obviously pass the second question to Ben, and I put it to Ben in a moment. I think in terms of practical milestones after December, I can't give you specific dates. But obviously, if everything is approved by the shareholders, we then have a set of articles of association where we've taken away some of the anchors that we're trying to move in order to think about converging into 1 line of shares and changing the tax domicile of the company to the U.K. We, as a Board, will have to meet at some time after this has been decided. Obviously, take stock as to how the world looks at that moment in time and then make the decisions to go forward. I can't give you any firm dates other than it will be sometime in the early part of 2022. But Ben, maybe you can talk about COP26 and add anything to my answer if you feel it's needed.

No, no, I think that was perfect. On COP26, yes, thanks for asking, Martijn. It's still a little bit early days. We haven't really been able to sort of listen back in with all the delegations back in their home countries to see exactly what the takeaways are. And we're also still studying what really came on. But I can say a few things. So first of all, I had 3 hopes for COP26. One, more ambitions. I think there are more ambitions. And of course, we have to see exactly how it all adds up. I don't think it comes to 1.5 degrees, but I do think we still have a chance and we do indeed have progress in the sense that we are ratcheting up ambitions to the point where we'll ultimately need to be. Then I had a hope that Article 6 would get operationalized. And I think there, there are very clear indications that a lot of progress has been made. We haven't studied yet exactly what has been agreed on Article 6, but I do believe there is a material progress. And bear in mind, there has been almost 0 progress since Paris. So therefore, indeed, making a step now, I think, is important, and therefore, something to be positive about. Then the third one I had was let's focus a little bit more on demand and let us do it on a sector-by-sector basis. I think there I have a question mark. I haven't seen much to be perfectly honest. Many of the pronouncements, many of the eye-catching statements were all out somehow curbing supply. And while I'm not necessarily against that as a concept because ultimately, indeed, we do need to also make sure if we don't lock in long-term development of fossil fuels that we are not going to need. I think, ultimately, this transition is going to happen on the demand side. And I don't think I have seen enough there to just say, yes, this was a good step forward. But maybe, Martijn, ask me again next time we speak, and then I will know a little bit more what really happened.

Thanks, Ben. And Martijn, I mean if I could add, I think, from the perspective of the Board, of course, there is more that might have happened at COP26, but there can be no doubt that the world as a whole wants to accelerate into the energy transition, not able to agree on everything. But that, of course, is exactly the kind of scenario that Shell is wanting to play into and to thrive into and fashion our strategy around. And part of the reason why we are making this change we've announced today so that we can move quickly and keep up with these changes that we think are going to come globally and provide opportunities for the business that we will create at Shell. So could we maybe take the next question now, please?

Certainly. We'll go next to Irene Himona with Societe Generale.

My first question concerns reference you make today to a bill submitted to the Dutch Parliament introducing potentially an exit tax relating to dividend withholding tax. And I wanted to ask, even though you expressed the view that you would not be liable to it. What sort of magnitude could that potentially amount to in a worst-case scenario? And my second question is just one of clarification, if I may. On the mechanism by which the new single share will be issued? Is it simply replacing the A and B on a one-on-one basis? Or are you canceling the A and B and then issuing a new share?

Okay. So on the exit tax, I'd like to ask Ben to answer that question. And then Jessica can, I think, give you some more details about what will happen to the different classes of shares. But just, I mean, obviously, we made it clear as a Board that we looked at a number of advice, a number piece of advice from several firms. We considered it ourselves, and we thought it was highly unlikely that this would be a material tax or a tax at all that we would have to pay. But maybe, Ben, you could explain in more detail.

No -- of course. And that's more or less it also, Irene. So of course, there is no law. There is a draft proposal that has been modified a number of times, previous versions of which have been basically declared unconstitutional by the State Council, the highest authority in the country. Now that may still mean that at some point in time, one of these bills may come and may even be applicable. But at this point in time, we have no way of knowing. We also don't know where that will apply to us. And we don't know exactly what at that point in time, might or might not be in the bill. And we might also not know whether that actually is still constitutionally applicable or whether it can or can't be challenged in a European tax court, in a Dutch tax court or under the Dutch U.K. Tax Treaty. Now we've received advice from 4 law firms in the U.K. and in the Netherlands to see how this will play out. There's other considerations that we can also factor into it. And it's very clear to us that the likelihood of us being liable to pay any of this exit tax, if it were to materialize this can be ignored. And even if you could do some sort of risk assessment [ model ], et cetera, we believe the benefits outweigh that risk cost. Now if you could say what is the worst scenario, I have no way of answering that question. That is essentially asking how long is a piece of string? I don't know.