Royal Dutch/Shell Group of Companies Strategy Presentation & Conference Call (New York) - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

HAROLD HATCHETT, HEAD OF IR, SHELL NORTH AMERICA, ROYAL DUTCH/SHELL: On behalf of the Shell team, I'm Harold Hatchett, the Head of Investor Relations for Shell here in North America. We would like to just welcome you to our Strategy Presentation, and I will turn it over to Jeroen van der Veer, Chairman of the CMD.

JEROEN VAN DER VEER, CHAIRMAN CMD, PRESIDENT OF ROYAL DUTCH PETROLEUM, ROYAL DUTCH/SHELL: Thank you, Harold. Is the sound okay? Welcome, everyone. Today is a big day for Shell because we, the new team, they sit there, but you will see them all in action can share with you how we take Shell forward.

It is about actions and it is about urgency. Over the past 6 months we have done already a lot, but much more has to be done. We attack that with energy and realism, and we drive Shell to be a different company.

If I then go to my first slide, oh you silly, I should have started the disclaimer. Take your time to read that. Okay? And then we move on.

So how are we going to do that? We only spent a few words today on our first half-year results. I think at this moment we make good earnings, good cash. It is not only the high energy prices. It is also because we have many good performing assets.

Then we have the reserves issue. I'll give you a brief update about that, as I will do about structure and culture. With structure, we mean the project, how we look at the governance and the top structure of the Shell Company. The main emphasis today is on the, it says there, clear strategic choices, so I start with that. Next slide, please.

How are we going to do that? You'll see that-- If you would have-- I'll re-phrase that. If you had asked me what is the strategy of the vision of Shell, you would stand in an elevator. I only need 5 words for that, and what is our strategy? It is more upstream and profitable downstream. Now okay, you say, I understand that, but put some meat on the bone. Now we can do that. First of all you have to make sure that you have the right portfolio. Now, you have 3 tools in the toolkit to get the right portfolio.

First of all, what is what you invest in your own company. We call that projects, or organic growth, and as we bring that up to $15b per year. Now, we have been relatively high in the middle '90s, but if I take then the end '90s, we were below $10b, and even 1 year significantly below $10b per year. And we were in the early parts of this decade, we were running the Company with a kind of philosophy of $12b per annum, and now we bring that to $15b.

Now organic growth is of course a very logical path forward when the energy prices are high, but there are more tools in the toolkit. You can do divestments, and you will see, you will hear a lot more about, today, about that. But if you look back over the past 5 years, we have done an order of magnitude of $20b of divestments, and that this year we expect about $4b, and the businesses will come back what else they have in mind.

And of course, acquisitions. Acquisition is a very logical tool. Only when the oil and gas prices are very high it will be difficult to create shareholder value. But if we can do that, we will not shy away from acquisitions.

Okay, then you have the right portfolio, and the second important aspect is what you have. You have to run that fairly well. That is raising the performance bar. And what we do is, we make it fairly clear to all Shell people in the world that what we have, we would like a top quartile performer, but you have to compare apples with apples. So if you have, you can of course look at worldwide costs of your production. I think it is more fair that you compare deepwater costs in the Gulf of Mexico with deepwater costs in the Gulf of Mexico with somebody else, or uptime of a complex refinery with an uptime of a complex refinery of the competition, or what is your marketing position, etc? You get the kind of feel.

And I think-- And that is of course a good motivator for the people as well, and it helps our people to look at the external world, because the message is, you have to do it better than the competition.

Now, if you invest so much, the $15b per annum, and if you think about our industry, the key skill or key capability for our industry is to execute multi-billion dollar projects. And that's often in difficult environments; it can be very deep water, it can be because there are hardly any billion-dollar projects done before, and for instance, we built a chemical complex in China. But that is an absolute key skill, and projects should be on time, on specification, and on budget. And if you have that skill and if that skill is recognized, then you are an attractive joint venture partner as well.

I am convinced that if you have the right portfolio, top quartile performer, you execute the projects, they have good returns and good cash generation. But I think management has to do more, and you have to think what is the best organization for your global company and what is the culture? It is not easy to set a culture. You don't have a lot on your desk, but I think you should have a philosophy what kind of company culture you try to drive.

And to that end, we have developed Enterprise First culture. I have come, this is more an internal story and I've gone in great depths in a speech in Houston in May this year into that, but I'll only give you a flavor. But we think that to make the Company successful, we have to drive top down, that we have to be better on leadership, accountability and teamwork. And it will of course help if we have a simplified organization with global operating models. That whole combination gives you the position to have sustainable cost competitive advantages.

The next slide, please. Let me update you, I said I'd brief you on the reserves issue. Now, what have we done or what is under the way that we feel that we have that behind us? We have counted the reserves, restated with the SEC, and we have reported that already. Then we have taken a lot of internal measures. Now, remember that it was a factor in February here in New York that somebody asked - this shoe has dropped, is there a next shoe to drop.

I was very grateful who asked that, and was the person who asked the next shoe, is he here in the room? No? Because I used that expression many times since. Is there any danger of a next shoe to drop? I think it is clear language, and the best reality to that is, we took a lot of measures. In total, we took about 13 real changes in procedures, measures in our organization, external auditors about reserves. I'm not going in detail about that, but if you like it I can do that later.

And of course, the whole finance organization. Tim Morrison will say some brief words about that, but we made a significant change there.

What's the future? Of course, we have to think about our reserves position, because our reserves life is relatively short vis-a-vis the competition, and Malcolm will spend a lot of time on that this morning.

Parallel to that, we have the authorities. We have settled with the SEC, settled with the FSA. As far as the other authorities, we follow the same philosophy, full cooperation. And where we have litigation, for instance, class actions, that is not full cooperation, no, we will defend ourselves.

If I update you about structure and governance, what is it that we try to do? In March, in fact on the first day that I stepped up to the chairmanship, I made it very clear to the Board that I think it is essential not so much be driven by the reserves issue, but basically to think about whether we have the right structure and governance to make the Shell Group successful for the future. And here you see the 4 key words where we have to figure it out to do it better than the status quo. It is about better effectiveness, a very clear accountability, transparency, transparency for people like you but for all the stakeholders, and more simple.

I think that if you look at the first page of our annual report, we tried to explain how the Group works, and that doesn't deserve the word simplicity. The work is probably more complicated than a lot of people think, because if you come out with a preferred option, you have to make sure that you don't have unexpected tax consequences, and taxation plays a major role in our industry.

Secondly, whatever we propose, it should be to the best of your knowledge, fair to all shareholders. And that may mean that you have to work through a lot of details before you know that a certain option is feasible. We are committed to come out in November. In fact, we work on very high speed. We spent already many weekends over the summer and I will spend coming weekends on it as well, because it is simply much more complicated than people expect.

But we have said, we stick our neck out. We will be back in November with a preferred option. And of course, the preferred option should fulfill those 4 words at the top of the slide.

It is not that we have waited in the meantime to introduce changes. You will see the non-executive Chairman already in place. Royal Dutch will give up their priority shares at the next AGM. We have a new executive team. You see them nearly all in action, but our new CFO starts on October 1. And below the Managing Directors, we have now clear accountabilities with CEOs and other organizational changes.

Then I go to the business environment. Now this is the whole topic, of course, everywhere where you go nowadays. But my message indeed, we think that oil and gas price outlook as we look forward now, is higher than we thought some years ago. And what is the basis of our thinking? And I've tried to summarize it in 2 slides.

If you look at the left-hand slide, there you'll see 3 things. First of all, for the coming 25 years, not a long-term time axis, the oil industry will grow, and they have the reserves, there will be the reserves to do that. So in the first 25 years, we don't think that the industry will plateau, the oil.

Secondly, gas growth as well, with gas growth more than oil.

And last but not least, we think it is quite possible that OPEC's share goes up. You see how high it can be in the year 2030. In order to have all those resources and reserves unlocked and converted to that increasing amount, if you go to the right-hand slide, you see the investment levels of this industry per year. This is a huge industry. We will be one of the largest investment industries, or the largest in the world. And IEA in Paris, they even think that the investment levels of the total industry will go up to $200b per year, that's - as I say - on the $25 level.

Now, the combination of the 2 slides or the increased demand and the investment levels, we think that that is the basis for a higher oil and gas price outlook. And I come back and I talk about the financial underpinning of our strategy.

How is it that we drive Shell forward? Now, I said more upstream, but given where we are, we say the one-liner for today is to regain the upstream strength. We have to realize we have a lot of good upstream positions, producing assets concessions. We are proud of what we do in gas. We are leaders in liquefied natural gas, but we know we have to improve the reserves. We know we still can do better in operational excellence. And we know that project delivery, which is so important, not all projects are going well. So we have to do that better as well.

But it is not only knowing about those reserves, operational excellence and projects, it is also to do that with urgency. And that's very important, that we get that in our culture. It is not only direction, and with a sense of urgency in our organization.

If I then turn to the downstream, Rob Routs will tell you a lot about the portfolio. I think we take really quite drastic restructuring actions, and this top quartile performance I have already explained just how important that is, and I think that can be a very powerful concept. Global organization and standardization, we are all the time going further with that. And of course that gives you very good cost positions, and maybe still a surprise but I still think this is new for our industry.

We will integrate our chemical manufacturing with the refineries, and as we see it really as one part of the organization. The reason that we do that, there you have synergies with the hydrocarbons, between refining and chemicals, utilities and of course specialists and staff. And that is the best way to grab those synergies and to make sure that you have a sustainable cost competitive advantage.

I come now to the financial underpinning of our strategy. I said already that this cash is very important to monitor. We have good cash at high oil prices, but it's also because we had many good performances. But for what do we use that cash? I have first 3 items which you have to see in a very close balance - that is dividends, and may I emphasize to you that since our dividend policy is declared in euros and British pounds that we're about a dollar adrift, we pay very high dividends. That is about $7.5b this year, Tim goes tells more details about that.

But some years, I can still remember that we were at $5.5b dividends, only some years ago. And it was not so much because we increased the dividend in line with inflation, this has of course to do with exchange rates. So it's about dividends, it is to fund our ambitions in the investments, and of course we'll make sure that if we have different business environments, that those investments still make money, and it is about a conservative balance sheet. This industry with inherent risks needs conservative balance sheets.

And of course, if oil prices are where they are today, then you have space for buybacks. That's how we see that.

We think it is also very important to know where the Company is cash breakeven, so that on the one hand the income we have from operations or divestments can fund the dividends and the new capital expenditure. We plan the Company at $20 per barrel, and that is as a consequence of this oil price outlook, we think that's too low.

If you heard what I said at the previous price, we think it is still, or that it is better to plan the Company at $25 per barrel. Because if you take a lower figure, then of course at a lower figure we have less cash income and then in order to make cash neutrality, what can you do? You have then to cut your capital expenditure or you have to divest more, but basically you do it then too conservative. Not good for the future of Shell, not good for shareholders.

On the other hand, if you do it too high and you ramp up your projects too high, you may wonder whether you have enough capability to do a quality execution. And if the business environment turns against you, then you have may start/stop, start/stop for projects, and that's not the way to do it.

I already shared with you that we bring this higher CapEx level. We really [killed] that to the upstream, and so that is the line more upstream. You see EP and GP together at $11.5b, and then you see our ambitions for divestments, and this is in the conservative figure. Tim will explain that.

Ladies and gentlemen, I think I have already said that it is all about actions and urgency. It is not about words in Shell, but how do you think, how do we judge ourselves and how can you measure us? I think these are for me the 5 key aspects to look at.

First of all, our earnings; are cash returns better than the competition? Secondly, which percentage of your assets do we have in the top quartile performance? And can we replace our reserves? Do we meet project milestones as we have announced them? And last but certainly not least, I still think that total shareholder return, and so what is our share price doing given the dividend that we pay compared to the competition? I think it is still one of the very best indicators.

Ladies and gentlemen, I've spent a few minutes touching on the key items, how we drive more upstream and profitable downstream. In the coming presentations, that will take about an hour, you will see in more depth how we will make Shell a different company. Thank you very much. This was my introduction. I'll come back at the end before we go to questions. It is now over to Tim.

TIM MORRISON, ACTING DIRECTOR OF FINANCE, ROYAL DUTCH/SHELL: Thank you, Jeroen. Although indeed we are having a tough year, we are a strong company with strong enough people, with strong enough finances. This year, we restarted the share buyback program. We've paid down a lot of debt. We've funded a heavy investment program, and of course, we've increased our dividend. We're moving ahead with a healthy balance sheet, able to fund this multi-year program we're engaged in, and with a balance between current distribution and growing the Company.

Next slide please.

Before I say more about the financial framework, I would like to say something about the controls. We might not normally do this, but it's part of the world we're in. Following the reserves program, we laid out in our annual report and indeed in our Form 20-F, the remedial measures that we would carry out. And these are being implemented with great commitment across the Company, and Jeroen mentioned this. Quite a lot has already been done. Some of the other programs take longer. There's a lot of training going on, and that runs out through this year.

And just one example, the new and expanded reserves audit team is now fully in operation, part of our central audit unit, not within our EP division, and using external reserve specialists. The business CFOs now report directly into the Group CFO and with Peter Voser's arrival at the beginning of the month, our finance leadership is now fully up to strength.

We're also in a world of externally mandated change in this area, and I just think of Sarbanes Oxley but also the International Accounting Standards changes, which we as a European company are implementing now. The Sarbanes Oxley 404 project, we're a year behind US companies, because that's the extension given to foreign listed companies. That's now fully underway across the Group, running up to the controls assessment at the end of 2005, and like with other companies, this is taking a lot of resource, but I personally think it will be very worthwhile when we've completed it.

The simplification and standardization programs that Rob and Malcolm will talk about are also helping, as well as improving operational efficiency. They improve the general controls environment for the Company. And finally, we're on track with our International Financial Reporting Standards project, and we will be briefing you more about that in quarter 4.

If I move on now to the financial framework, Jeroen noted we performed solidly in the first half, and this performance comes on top of 3 years of consistent earnings from the portfolio. And while we look to improve the portfolio further, the current portfolio has delivered cash flow growth from each of the past 3 years, and the first half of this year continues that pattern. It's helped, of course, by high margins and prices but as Jeroen also pointed out, we've got some good operating businesses there.

I have to say our return on capital is not as competitive as we would like it to be. This is partly due to weaknesses in the portfolio, which we're working on, but also due to our heavy current spending program. We have, I think, a higher level of capital not yet in use than some of our competitors, and the figure currently is around $17b/$18b. That will rise over the next 2 or 3 years before falling away sharply as some of these larger projects come on-stream. And of course, the weak dollar also drives up costs for us.

Cash generation, including very active portfolio management cash, has been strong from both upstream and downstream businesses, particularly strong from the downstream. So we have a balanced portfolio there. And taking that, and taking the portfolio work we've been doing, I think it's fair to say that despite what we've been going through, we've maintained momentum in the Company.

There has been growing debate in the industry. I …