The FINANCIAL — Royal Dutch Shell plc (Shell) Chief Executive Officer, Ben van Beurden, on November 28 updated investors on the company’s strategy, setting out plans to grow returns and free cash flow, and outlining its ambition to reduce the net carbon footprint of its energy products.
“Our next steps as we re-shape Shell into a world-class investment aim to ensure that our company can continue to thrive, not just in the short and medium term but for many decades to come,” said van Beurden. “These steps build on the foundations of Shell’s strong operational and financial performance, and my confidence in our strategy and our ability to deliver on the promises we make.”
Van Beurden highlighted three updates from his presentation: “We have increased our outlook for organic free cash flow, which has been consistently strong over the past five quarters. We have also made significant progress with our divestment programme, allowing us to reduce net debt in that time. Meanwhile, we intend to cancel our scrip dividend programme with effect from the fourth quarter 2017.”
The company also announced a net carbon footprint ambition covering not just emissions from its own operations but also those produced when using Shell products. “Shell aims to cut the net carbon footprint of its energy products – expressed in grams of CO2 per megajoule consumed – by around half by 2050. As an interim step, by 2035, we aim to reduce it by around 20%,” said van Beurden. “We will do this in step with society’s drive to align with the Paris goals, and we will do it by reducing the net carbon footprint of the full range of Shell emissions, from our operations and from the consumption of our products.”
Van Beurden concluded: “Taken together, these next steps, and the strategy and portfolio strength that underpin them, will deepen Shell’s financial resilience and competitiveness, help to ensure our long-term business relevance and keep us firmly on the path to becoming and remaining a world-class investment.”
Shell has made the following updates to the company’s financial outlook:
The outlook for annual organic free cash flow has increased to $25 to $30 billion by 2020 at a Brent crude oil price of $60 per barrel (real terms 2016). This is $5 billion more than the outlook Shell provided during its capital markets day in June 2016.
Debt reduction remains a priority. Gearing stood at 25.4% at the end of Q3 2017 and additional divestment proceeds of more than $5 billion since then mean that 20% gearing is in sight.
The delivery of new projects continues, and the company remains on track to deliver 1 million barrels of oil equivalent per day, and $10 billion of cash flow from operations from new projects by 2018 (at $60 per barrel, real terms 2016). We expect to deliver an incremental $5 billion cash flow from operations by 2020.
The $30 billion divestment programme between 2016 and 2018 is almost delivered, with deals worth $23 billion completed (headline), $2 billion announced, and $5 billion in advanced progress. Once this programme is completed the company expects to continue divestments at an average rate of more than $5 billion until at least 2020.
The company’s commitment to capital discipline remains. Annual capital investment will continue to be between $25 and $30 billion, and at current oil prices capital investment will be managed towards the bottom end of that range, or lower if needed.
Annual underlying operational expenditure will remain below $38 billion until 2020, with efficiency gains expected to deliver further reductions, building on the more than 20% reduction in operational expenditure since 2014.
The company expects to continue to grow organic free cash flow throughout the 2020s at a more moderate rate. Increased distributions to shareholders in the form of share buybacks in line with the plans confirmed below is expected to support a stronger growth in its metrics per share.
Increasing distributions to shareholders
The company is confident it can cancel its scrip dividend programme while investing at sufficient levels to maintain value accretive growth in the portfolio. The strength of its balance sheet, coupled with stronger cash flow and a relentless focus on capital efficiency, discipline and flexibility, have given the company the confidence to cancel the scrip dividend programme with effect from the fourth quarter 2017 dividend. Separately, as per intentions stated in December 2015 at the time of the combination with BG, the company is confirming the plans for share buybacks of at least $25 billion in the period 2017-2020, subject to progress with debt reduction and recovery in oil prices.
Against the backdrop of ongoing volatility in the energy sector, Shell today presented the following updates to investors:
In Integrated Gas, the resilience and good financial performance of the business continue to be underpinned by its position as a leader in both the global liquefied natural gas (LNG) and gas-to-liquids value chains, as well as by the underlying strength Shell sees in natural gas and LNG markets. To sustain its strength and competitive advantage in LNG through the 2020s, the company will continue to assess opportunities for selective growth – cost competitiveness will be a key decision criterion.
Upstream has implemented a successful and continuing operational excellence programme, delivering more production and lower costs. A focus on capital efficiency and portfolio optimisation has led to a more resilient and competitive performance. Management is confident in the growth, increasing returns and sustainability of the company’s upstream portfolio into the next decade.
Downstream continues to deliver strong financial performance, due to highly integrated refining, trading and marketing operations, and premium products, in addition to competitive growth in the Chemicals business. Strong brand and customer reach are key differentiators that Shell will leverage further to increase the size of this growing and high return business.
The development of new energies as a future growth platform will accelerate and the company will increase the capital allocated to this business to $1 to $2 billion per year until 2020. Shell will continue to target opportunities in new fuels and power, two businesses adjacent to its Downstream and gas businesses that play to Shell’s existing strengths in brand and value-chain integration.
Shell groups its seven strategic themes into three categories – cash engines, growth priorities and emerging opportunities.
Integrated Gas, conventional oil and gas, and Oil Products are currently cash engines; deep water and Chemicals are growth priorities; shales and new energies are emerging opportunities. Illustrating the dynamic nature of the company’s portfolio, the intention is for deep water to have become a cash engine by 2020, and shales to have become a growth priority by 2020.
Reducing net carbon footprint
Shell further positioned itself for the future today by unveiling its ambition to cut the net carbon footprint of its energy products by around half by 2050. As an interim step, by 2035 it will aim for a reduction of 20%.
The company will measure its progress by disclosing the net carbon footprint not just from its operations and energy use, as it does now, but also from the use of its energy products, expressed in grams of CO2 per megajoule consumed and taking account of any emissions offset. This measure will be tracked over time, with reviews every five years to ensure Shell is progressing in line with societal progress towards the carbon footprint reduction required to meet the Paris goals.
“Tackling climate change is a cross-generational, global and multi-faceted effort,” van Beurden said. “This is a challenge for the whole planet, for all of society, for customers, for governments and indeed for businesses. It will mean meeting increasing energy demand with an ever-lower carbon footprint. And it is critical that our ambition covers the full energy lifecycle from production to consumption. We are committed to play our part.’’