Royal Dutch Shell plc (NYSE:RDS.A) Q3 2019 Results Conference Call October 31, 2019 9:30 AM ET
Jessica Uhl – CFO
Ben van Beurden – CEO
Conference Call Participants
Oswald Clint – Bernstein
Christyan Malek – JPMorgan
Thomas Adolff – Credit Suisse
Lydia Rainforth – Barclays
Jason Gammel – Jefferies
Michele Della Vigna – Goldman Sachs
Henry Tarr – Berenberg
Jon Rigby – UBS
Irene Himona – SocGen
Dan Boyd – BMO Capital Markets
Martijn Rats – Morgan Stanley
Peter Low – Redburn
Christopher Kuplent – Bank of America Merrill Lynch
Lucas Herrmann – Exane
Welcome to Royal Dutch Shell 2019 Q3 Announcement. There will be a presentation, followed by a Q&A session. [Operator Instructions] Today’s conference is being recorded.
I would now like to turn the call over to Mrs. Jessica Uhl. Please go ahead, ma’am.
Ladies and gentlemen, welcome to Shell’s third quarter results call, and thank you for joining us today. Before we start, let me highlight the disclaimer statement.
In today’s call I will take you through Shell’s performance and the results for the third quarter. We will also look at how these results fit into our longer-term trends, supporting progress towards our outlook for 2020 organic free cash flow. Later, I will also highlight the successes we have seen in our retail and LNG businesses, both of these businesses are core to our world-class investment case, and embrace the strengths of our brand, scale and capabilities.
But let us begin with our financial performance. Last quarter we continued to deliver strong cash flow and earnings. This is despite continued weak oil and gas prices, and chemicals margins. We have seen the value potential of one of our core strengths, trading and optimization, which allowed us to capitalize on the current market conditions. This has resulted in very strong performance from Integrated Gas and Downstream. We have also seen our resilient marketing businesses generate strong returns last quarter, showing the strength of our scale, brand and customer offering, while in our Upstream business, we did not achieve the level of earnings and cash that we know it can generate.
Our cash flow from operations for last quarter was $12.1 billion, excluding working capital movements. Our financial performance allowed us to cover the full cash dividend, interest payments, and share buybacks. And when we review this from a four-quarter rolling perspective, with the future support from our projects continuing to ramp up, we are trending towards the delivery of our $28 billion to $33 billion organic free cash flow outlook in 2020. However, softer macro conditions did impact our Q2 and Q3 cash flow from operations, excluding working capital movements, by some $5 billion in total, when compared to the same period last year.
Our outlook is tied to an improved price and margin environment, at Real Terms 2016 $60 per barrel and mid-cycle downstream, and the prevailing weak macroeconomic conditions and challenging outlook have lead to a review of our near-term price outlook.
While generating industry-leading cash flows is key to our world-class investment case, this is not our only ambition. We also have the ambition to maintain a strong societal license to operate and to thrive in the energy transition. You may have heard about the principles for responsible investment event, it is the leading global conference on responsible investment. This year, the conference took place in Paris and with about 1,600 delegates, was probably the biggest yet. Ben, our CEO, had been invited for a keynote interview conducted by our institutional investors from the Climate Action 100+ initiative, who have led the engagement with us on the climate change statement, which we jointly released in December last year.
The interview reflected on the progress Shell has made on its commitments, but also more generally on the transition to a net-zero emissions environment. Importantly, our investors highlighted Shell as leading in addressing climate change in our sector, and we continue to work actively with investors across sectors to accelerate action. We believe we are taking meaningful steps to provide solutions and reshape our business models to thrive through the energy transition.
I would now like to move on to some of our recent portfolio highlights.
In Q3, active portfolio shaping continued. We achieved 2 FIDs, 4 start-ups, 3 new opportunities for growth and 3 divestments. In the third quarter, we saw the start-up of two projects in Nigeria; the Forcados Yokri Integrated Project and the Southern Swamp Associated Gas Gathering Project. In Nigeria, the levels of hydrocarbons flared from the SPDC joint venture facilities have fallen by close to 90% between 2002 and 2017. SPDC remains committed to eliminating associated gas flaring with reductions already realized from gas gathering initiatives while it continues to invest in facilities that capture the associated gas and commercialize it through domestic and export markets. These two projects add to these efforts and show the JV’s commitment to the development of the Delta State and Nigeria.
Through its strong relationships to support business growth and our societal license to operate, in October, we announced our final investment decision on the Pierce Depressurisation Project in the UK Continental Shelf building on our significant presence in the North Sea. The development work will take place between 2020 and 2021, and once complete, the Pierce Gas Field is expected to produce more than 30,000 barrels of oil equivalent per day at peak production.
In September, we announced the completion of the Gumusut-Kakap Phase 2 project, in Malaysia. At peak production, the four additional wells that we have drilled will add 50,000 barrels of oil equivalent per day to the semi-floating production system. This will achieve the rated production capacity of this project of 165,000 barrels of oil equivalent per day.
Each of these are great examples of how we are unlocking opportunities and future value, and through the combination of brownfield and greenfield projects, we will support our next phase of growth.
Now, let us turn to our financials for the quarter. For Q3, cash flow from operations excluding working capital movements was $12.1 billion. As I have also highlighted, we continue to see pressure on prices and margins for oil, gas, and chemicals. Oil and gas prices softened further, while there was some recovery in Refining margins, with overall realized prices and margins lower, when compared with Q3 last year.
In the third quarter, Brent was at an average price of $62 per barrel and our organic free cash flow was $6.6 billion. Earnings amounted to $4.8 billion and our return on average capital employed was 8.1%.
For Q3 2019, our gearing was 27.9%, or 23.5% on an IAS 17 basis. Our cash capital expenditure in the quarter was $6.1 billion. And for the full year 2019, we will keep our spend around the lower end of the $24 billion to $29 billion cash capital range. Our share buyback program is progressing with some $12 billion in shares purchased to-date, since the start of the program in July 2018. And the next tranche of up to $2.75 billion begins today.
During the last quarter, we bought back $2.9 billion of shares. We have now offset all scrip dividends issued post the BG Group combination. While our intention to buy back $25 billion of shares remains unchanged, the pace of the program is subject to our progress on that and macro conditions. We are conscious of the risks to the economy and the outlook for the Upstream and Downstream macro environments, while acting in line with our commitment to preserve our financial framework.
With the prevailing weak macroeconomic conditions and challenging outlook, including Refining and Chemicals margins at below mid-cycle levels, the ability to reduce gearing to 25% and completing the share buyback program may take additional time. We review the share buyback amount on a quarter-by-quarter basis.
Now, let us look at our earnings in more detail. Q3 2019 earnings were down largely due to lower prices and margins. Earnings in the third quarter were $4.8 billion, some 15% lower than in Q3 2018.
In our Integrated Gas business, total production was 4% higher compared with the third quarter of 2018. This was a result of new fields ramping up in Australia and Trinidad and Tobago. LNG liquefaction volumes increased by 9% compared with the third quarter 2018. LNG liquefaction volumes increased mainly as a result of new LNG capacity from Prelude as well as increased feed gas availability compared with the third quarter 2018.
Integrated Gas earnings were $2.7 billion, reflecting higher volumes and significantly stronger contributions from LNG trading and optimization. These earnings were partly offset by lower realized LNG, oil and gas prices.
In Upstream, earnings were some $900 million, reflecting lower oil and gas prices, lower gas production, and increased well write-offs mainly in Kazakhstan. These well write-offs are a result of the decision not to progress the Kalamkas and Khazar projects. These projects were not deemed competitive versus other opportunities in Shell’s global portfolio. Shell is one of the largest investors in Kazakhstan and looks forward to continuing its cooperation with the Republic of Kazakhstan on future projects in the country.
Third quarter Upstream production decreased by 2% compared with the same quarter a year ago. This was caused by portfolio effects and weaker operational performance in the Gulf of Mexico and Norway. Excluding divestments and other portfolio effects, production was up 2% over the same period.
In Downstream, earnings were $2.2 billion in the third quarter, up from $2 billion in the same quarter last year. This reflects higher marketing returns, and also includes stronger contributions from oil products trading and optimization, as we realized opportunities from our well-positioned and integrated portfolio in the lead up to the International Maritime Organizations’ stricter environmental rules for shipping fuel, which will start on the 1st of January 2020. Our Downstream earnings were partly offset by lower realized margins for refining, base chemicals and intermediates.
In the Corporate segment, our underlying earnings excluding identified items were aligned with the latest outlook where we also highlighted a weakening of the Brazilian real, generating a negative earnings impact.
Now that we have covered our earnings, let me turn to cash flow. Our cash flow from operations, excluding working capital movements, amounted to $12.1 billion. This is $2.6 billion lower than in Q3 last year. In our Integrated Gas business, cash flow from operations in Q3 2019 was $4.2 billion, some $900 million or 27% higher than Q3 2018. In Upstream, our cash flow from operations was $4.4 billion, around $2.3 billion lower than in the same quarter last year.
In our Downstream business, our cash flow from operations was $3.2 billion, some $2.2 billion higher in Q3 2019 when compared with Q3 2018. This largely reflects the negative impact on working capital in Q3 2018, resulting from higher inventory price and volume movements.
Now, let’s review how we have delivered over a longer period. On this slide, you can see our financial trends across an extended period, and as I have said in previous quarters, they are moving in the right direction, particularly given the softer macro in Q3.
Looking at our gearing, this was 27.9% at the end of Q3 2019, more or less at the same level as Q2 2019. There are a number of factors affecting our gearing calculation, such as additional leases being brought onto our balance sheet, and movements in equity through revaluation of our pension liabilities. For example, last quarter, we brought the lease for the Elba LNG terminal in the U.S. onto our balance sheet, adding $1.4 billion to our net debt. And with the current outlook on macro, equity movements and lease recognition, gearing is likely to stay above 25% during 2020, on an IFRS 16 basis.
Our net debt at the end of Q3 2019 was around $75 billion, on an IFRS 16 basis. This is some $7 billion lower than at the end of 2017. It is important to note that, we have been deleveraging our balance sheet and our priority remains to reduce net debt in 2020. We remain committed to maintaining AA equivalent credit metrics.
Now, you’ve seen the quarterly results and how these fit into our four quarter rolling financials, let us look at how this supports our 2020 organic free cash flow outlook. This outlook is based on Real Terms 2016 $60 and mid-cycle Downstream and prices in the second and third quarters have been below this level. On a normalized four-quarter rolling basis, we have generated some $21 billion of organic free cash flow. Our growth in cash flows, towards 2020 from key operating assets, is supported by the ramp-up at Prelude and Appomattox.
Since start-up, Prelude has delivered a total of 8 LNG cargos, as well as condensate and LPG. Our focus remains on safe and reliable operations as we continue the production ramp-up. Appomattox is also ramping up, producing around 45,000 barrels of oil equivalent per day over the last month from three wells, with 15 more wells in the total drilling program yet to come online. This means production from Appomattox will continue to increase in a phased manner as we bring more wells on line in 2020.
With these assets safely ramping up, and after adding back the impact from IFRS 16, you can see that we’re progressing towards the range of $28 billion to $33 billion of organic free cash flow by the end of 2020. Last quarter, we saw strong cash flow and earnings, despite continued weak margins and lower oil and gas prices. This shows our resilience through the cycle.
Before I wrap up, I wanted to talk in more detail about two of our businesses that have delivered competitive and resilient results during the third quarter, LNG and Retail. We are a market leader in LNG and our portfolio is unmatched, with diverse supply and demand positions across the world.
In 2018, we sold some 71 million tons of LNG, a 22% share of worldwide sales. The majority of our volumes, some 58 million tons last year, is sourced on a long-term basis. And this is largely matched by long-term sales agreements. The pricing of more than 80% of these term contracts is linked to the oil price, typically with three to six months’ time lag.
In addition to our term volumes, we choose to purchase or sell additional LNG on the spot market. These transactions are discretionary and we only pursue them if they are value-accretive. While the value we generate from spot and optimization opportunities might vary from quarter-to-quarter, our world-class trading and optimization capabilities allow us to deliver material and resilient cash flows from our leading portfolio. The performance last quarter demonstrates our strength in trading and optimization, and it also shows how the current weak spot LNG prices have little impact on profitability in our business, with the oil price remaining the main macro driver for the Integrated Gas results.
Now, let me touch upon another topic that is of interest to market observers and investors, LNG contract price reviews. Price reviews are a normal feature of long-term contracting and can differ from contract to contract. Contracts typically include terms detailing the timing of contract amendments and how revised pricing will be established. For example, while a contractual price formula may change, it would be extremely unusual for the underlying price indexation to change. From the price reviews that are currently ongoing in our portfolio, we do not expect a significant impact on this or next year’s results.
Our 2025 cash flow outlook already takes into account anticipated changes from price reviews, where required. And let’s not lose sight of the longer-term fundamentals of the LNG market. Natural gas plays a key role in the transition to a cleaner energy system. And as we said at our Management Day earlier this year, we expect LNG demand to grow at 4% per year. We are planning to grow with it, keeping our leading position.
Not only do we expect growing demand, we also see a supply gap emerging in the mid-2020s, once the current wave of new liquefaction capacity has been absorbed. Consequently, we are seeing continued interest in long-term contracts from LNG buyers. In Hong Kong, for example, we recently signed a long-term agreement for the supply of LNG for its first LNG terminal. This secures a new market in Asia. You can see why we believe in LNG as a fuel and as a strong business and why we are committed to continue investing in our LNG portfolio to grow cash and returns.
Another part of the business that did particularly well during Q3 was retail. I thought it would be useful to share some of the progress we’ve made with the retail growth strategy we presented at the Downstream Open House, in March last year.
Our retail business currently serves more than 30 million customers every day with more than 45,000 sites in almost 80 countries, enabling Downstream to generate $3.2 billion in cash flow from operations in Q3. And there is more to come. We are on track to deliver on our 2025 growth targets and reach 55,000 service stations in more than 90 countries, serving more than 40 million customers every day. We will do this by extending our leading position through three key strengths: Our scale; our brand recognition with differentiated product and service offerings; and our excellent customer focus.
Let me start with the scale of our facilities. We aim to expand in key growth markets like China, India, Indonesia, Mexico and Russia through adding 5,000 new sites across these markets by 2025. Since 2017, in addition to optimizing our existing portfolio position, we have added around 1,000. China is significant for our growth ambitions. We have been investing materially to strengthen our brand there, now reaching the third position overall in this market and occupying the leading position among international energy companies.
Apart from growing in new markets, we are also increasing our existing markets by adding 5,000 new sites compared to 2017 by 2025. So far, in addition to optimizing our existing portfolio position, we’ve added over 1,500. Another area for expansion is our convenience stores. We want to add 5,000 stores across our network by the end of 2025, compared to 2017. To-date, we’ve added more than 1,500.
Our convenience stores bring me to the second and third way to extend our leading position with our brand recognition through our products and services. Like our premium fuel Shell V-Power, which currently constitutes one in every five liters of fuel we sell in the world, and like our non-fuel retail offerings such as coffee and lubricants. Non-fuel retail margins have increased by 10%, compared to last year. Lubricants play an important role in this result. To meet growing demand, this year we’ve opened 400 additional Shell lubricant servicing outlets, where people can have the oil in their vehicle changed and have minor check-up or repairs done. Another successful service we want to keep growing is Shell Fleet Solutions, which now has more than 8 million customers. We support our customers by playing a leading role in the handling of electronic tolls for transport companies. The driver uses one Shell card to pay for tolls and fuels and the company receives one periodic invoice, making the administration experience easier.
In addition to our facilities and products, another way to extend our leading position in retail is through our customer focus. We have 500,000 service employees working for us around the world. And they make sure Shell meets the needs of our customers today, and in the future. This means we keep evolving to meet the changing needs of our customers.
Across our Retail portfolio, for example, we continue to expand our presence in electric battery car charging. Shell Recharge, our fast charging brand is now present in 300 forecourts across our global network. Also, in Q2, we introduced carbon-neutral driving in the Netherlands. This means Shell will offset customer’s emissions by purchasing carbon credits generated from projects that plant and protect nature like forests, wetlands and other natural ecosystems.
Earlier this month, results showed that 1 in every 5 customers are choosing to drive carbon-neutral when fueling at Shell. And, since the 10th of October, customers in the UK can also drive carbon-neutral through our loyalty app GO+. We aim to expand the offer for carbon-neutral driving into more countries. While the Retail business is supporting our ambitions of being a world-class investment case and helping Shell thrive through the energy transition, we are also committed to building a business that has a strong license to operate. There are several initiatives retail is undertaking to support this, for example, how we connect with larger initiatives like playing an active role in finding lasting solutions to end plastic waste. Shell’s Retail business is helping its service stations and customers reduce, reuse and repurpose waste across its operations and supply chain, with initiatives from incentivizing reusable cups and bags, to converting plastic waste into eco-bricks.
As you can see, Retail is delivering strong results for Shell. And by offering more and cleaner choices to motorists around the world, Shell and Retail will continue to grow.
In summary, Shell showed its competitiveness and resilience in Q3, delivering strong cash flow and earnings, despite a challenging macro environment and some operational shortfalls. Our Upstream, Refining and Chemicals businesses certainly have the potential to generate more cash. You saw our Marketing business generate resilient returns and our trading and optimization teams, in Downstream and Integrated Gas clearly did very well last quarter.
Looking forward, especially with projects like Appomattox and Prelude ramping up, and continued focus on improving asset performance, we will further strengthen and grow the cash flows from our businesses to continue to progress towards our 2020 outlook and the ambition we expressed to strengthen our balance sheet and grow shareholder distributions sustainably.
In summary, there are two key messages for the third quarter. The first is we continue demonstrate delivery of our strategy and therefore achieve competitive and resilient cash flow delivery. The second is weaker macro conditions today and outlook matters to us, today’s performance and our trajectory. Given the relationship of the macro to our outlook, we thought it would be good to hear directly from Ben, and so Ben has joined me for the Q&A session today.
With that, let’s go for your questions. Please, could we have just one or two, so that everyone has the opportunity to ask a question. Thank you.
[Operator Instructions] Our first question today comes from Oswald Clint with Bernstein.
Thank you very much, Jessica and Ben. Yes, perhaps just around this buyback indication for 2020. I guess, if we just go back four or five months ago in June, the slides were suggesting a pretty confident delivery of those 2020 targets. So, what’s changed in the last five months to really promote with a much more conservative commodity price view for 2020 in terms of the buybacks? But, perhaps what I wanted to see is if the macro was to improve, do you feel confident on delivering the final $10 billion worth of buybacks in 2020? That’s the first question.
And then, really, back on Chemicals, you spoke about Chemicals being below mid-cycle levels, I do note your indicator margins came back in 3Q, back to last year’s levels and up from the second quarter; your volumes are off a little bit, but the earnings are kind of still down 50% or so year-over-year, Moerdijk gets back. So, I’m just wondering, is there something else going on or some extra issues happening within the Chemicals division, please?
Thank you, Oswald. I’ll start off and then invite Ben to add particularly on the first question. In terms of the outlook and what’s changed, it’s really a reflection of the macro environment we’ve witnessed in Q2 and Q3, and additional signals we see a bit of — across the portfolio and across the economy. And I think you’re likely well aware of them. The climbing interest rates are also an indication of the expectations of the strength of the economy going forward. That certainly has happened throughout the course of the year and most recently, this week, softening demand in terms of the pace of oil growth is being experienced, and that’s playing into sentiment in oil and gas sector and certainly prices in the oil and gas sector. We’re not seeing much response from risk in the oil and gas market in terms of prices. So, the overall fundamentals around demand, there’s some uncertainty around supply response, but also the acceptance of risk in the market points to probably a lower outlook than perhaps we had in the first half of the year. That’s on the Upstream side.
On the Downstream side, again, very low Refining margins experienced in Q2, a little bit of a bounce back in Q3. But again, in terms of the fundamentals of the sector and the outlook, it’s quite possible that we will not get to mid-cycle margins in the Refining sector and on the Chemicals sector, a couple of things that play on the margin side, while some of the marker margins did improve in terms of the product slate that we have. What we’re achieving in terms of the products in our portfolio has not seen a positive rebound from prior quarters or from prior years. And so, we’re very much experiencing a lower margin environment for our portfolio. I’d also say that we’re also seeing some lower volumes in the Chemicals business as well, which for us is also an indication of potential softening of the economic environment as well.
So we’re seeing it today. We don’t see reason to believe — or there is not a huge amount of optimism out there in terms of rapid improvement. That’s not to say, it can’t improve or won’t improve, either on the Upstream macro environment or the Downstream. And if it does, that’s a very different circumstance. What we’re trying to emphasize here as we’ve done throughout our engagement with the market over the last few years, whether it be Management Day ‘17 or Management Day ‘19, or Management Day ‘16 for that matter, the macro matters for us. And we’ve always conditioned our outlooks in relation to RT ‘16 $60 and mid-cycle Downstream, and we’re not seeing that today and there is a real potential that that will continue going forward.
Ben van Beurden
Yes. Oswald, it’s Ben here. I think, it’s important to emphasize a few points back to what I think is a very sort of sensible question to us, what has changed since the 6th of June earlier in the year. First of all, nothing has changed, when it comes to our plans, and nothing has changed when it comes to our intentions. So, very clearly, we are still completely intent on buying back $25 billion of shares and we are also completely committed to strengthening the balance sheet by bringing debt down. So, that hasn’t changed. But, what has changed, of course, is the macro since then. And the macro matters, as Jessica says. So, we always said, we have an outlook for the end of the decades, for next year, which is premised on $60 Real Terms ‘16 Brent, associated gas prices, mid-cycle margins. And if you just look at what is happening in the last quarter and are projected forward from Q3, Q4 and the whole of next year, if nothing would change, what we are essentially losing is $2 billion to $3 billion in the Downstream because we are below the mid-cycle conditions that we were premising, and about $5 billion to $6 million lower cash, because we are below the oil and gas prices. This is if nothing would change anymore from here on.
So, if you add it up, that’s about $8 billion to $9 billion of less cash coming in compared to the referenced conditions against which we have premised our outlook. And that matters for us, $8 billion to $9 billion is a lot of money. It matters at the scale of the buyback and debt reduction ambition that we have set to ourselves.
But, I think, therefore, it is sensible that we caution that the current macro, it — certainly, if it persists is going to affect us. But, let be also very clear, I do not want to leave you with the impression that something somehow that’s changed inside the Company. And we also don’t want to signal that our intentions have changed. But, if indeed the conditions, as we have seen them since the middle of the year, are going to prevail for six quarters in a row, then I think, it is prudent to let you know that we will also be affected by that type of macro.
Okay. That’s very clear. Thank you.
And next, we’ll move to Christyan Malek with JPMorgan.
Hi, Ben and Jessica. And thanks for taking my questions. And sorry, the line is bad as I’m on my way to the Middle East. Two, if I may. The macro activity is broadly the same and your cash flows have improved. And Ben, you confirmed the 2022 cash flow outlook. This is just that you’re more bullish in the context of what you’ve done today with the cautionary statement on your price assumptions. With that in mind, at the risk of sounding like a broken record, surely this creates a greater focus and priority to solve for lower cash breakevens closer to where the back end of the curve is in order to bring the capital framework in line with today’s macro reality. At the moment, this is still in the mid-60 — mid to high-60s. And so, this begs the question, is your $125 billion in cash returns of 2021 overly optimistic, and does that need to be revised? And if not, what are your levers to help mitigate the target? And secondly, if I may, and somewhat linked to deterioration in gas prices in the IG business, can you confirm that your sales volumes on Prelude as well as other projects that went over the $100 a barrel, can generate an implied positive cash return, or are they now loss-making? Thank you.
Christyan, thank you for the questions. In terms of our outlook on the macro and any changed views, go back to a few points that are raised and again just restate what Ben has said, in terms of has anything changed, fundamentally things haven’t changed. Our intent is clear in terms of our buyback, strengthening our balance sheets, increasing shareholder distributions while continuing to investing and grow the Company. And those intentions are unchanged. Our financial framework is unchanged in terms of ensuring we get the strengthened balance sheet. And the conditions haven’t changed. What we’ve said from the beginning is that we would strengthen the balance sheet that was subject to net debt, and the further condition was the right macro environment.
We’re simply pointing out that the current conditions we’re experiencing from a macro perspective where we’re seeing both softness in the Upstream macro and the Downstream macro at the same time, not unheard of, but slightly unusual, we’re experiencing. And there’s reasons to believe that that can continue. It may not continue, and this conversation would be less necessary, if it does not continue. But the point is, what we’re experiencing today and if that should continue, we’re simply making a statement that’s consistent with the way we have framed our intentions in the past.
I think, in terms of going forward and the strength of the Company and our ability to achieve the $25 billion and the 25% gearing level, I have full confidence in the ability of the Company to do that against the weak macro, as you’ve pointed out, our cash flaw is very strong, organic free cash flow is some $6.6 billion for the quarter against a relatively weak macro and there’s more coming from the Company through the growth of our projects, so the ramping up of our projects and continuing to focus on operational excellence. So, there’s more cash to come and that really drives our ability to deliver.
And of course, this year against the weak macro, we will likely get to at least $24 billion to $25 billion in total shareholder distributions for the year. And so, if you think about the statements we made in Management Day ‘19 in June in terms of the level of shareholder distributions, we’re essentially achieving on what was premised on an annual basis, here in here in 2019 and a relatively soft macro. And of course, the outlook through 2025 had some anticipation — had RT ‘16 $60 as well. So, there’s some anticipation of improved macro certainly for the Upstream business. But, it was also premised on a mid-cycle downstream as well.
So, I think, if you take into consideration the price environment and you look at the underlying delivery of the Company today, and the strength of our cash flow today, I think there’s a lot of reasons to find confidence in terms of the underlying performance of the Company and our ability to continue to grow cash flows out to 2025 and increase shareholder distributions, as we indicated back in June.
Ben van Beurden
Let me also add to that Christyan, also from my side. I’d like to completely endorse that statement. The $125 billion of shareholder distributions that we presented as an outlook for ‘21 to ‘25, that is still completely intact. There is no reason to change any message around that.
And on your second question, Christyan, I — so, we have a portfolio that we manage our LNG business around in terms of the supply of that portfolio and the sales in that portfolio. So, I fully expect that the Prelude cargos going forward will contribute materially in terms of our cash flow growth over coming years.
Thank you. Next question?
Next, we’ll hear from Roger Read with Wells Fargo. Mr. Read, your line is open. And not getting a response off that line, would you like me to move on?
Yes. We can come back if Roger becomes available later.
Okay. Next, we’ll to Thomas Adolff with Credit Suisse.
Good afternoon, Jessica and Ben. Two questions for me, please, as well. Just firstly, just going back to the buybacks. Before you give any guidance, you run many scenarios, and you do have a lot of built-in contingencies. So, say, you do lose $8 billion to $9 billion, if the macro doesn’t change, you do have the flexibility to take CapEx down to $24 billion or by $5 billion or even more if you wanted to, without damaging the business. You do get the disposal proceeds of $5 billion or more each year. And to be frank also, you have the IMO tailwind in refining in 2020. So, I was wondering, even with these contingencies or whatever contingencies you had in place, is the macro simply just offsetting all of these? And then, perhaps again going back to the ‘21 to ‘25 outlook, can you comment on the embedded contingencies in that plan as well?
And then, secondly, just on your comment on gearing for 2020, you talked about gearing likely being higher than the 25%. What level of buyback is assumed in that analysis? Thank you.
Thank you, Thomas. And, I think those were three questions, but that’s okay. On the first one, in terms of share buybacks and levers, et cetera, indeed we are having to manage for several outcomes that we’re looking to achieve. We’re looking to grow the Company. So, we need to deploy our capital for the most attractive projects and grow cash flow over time and we continue to do that. And that’s part of what’s driving increased cash flows that you see today. And we will continue to invest to ensure the long-term health of the Company. We want a stronger balance sheet in general, and in particular, if there is headwinds on the horizon from an macroeconomic perceptive, even more so to be having a balance sheet robustness in mind. And then, finally, we are looking to deliver on the world-class investment case in terms of increasing shareholder distribution through time and ultimately dividends per share through time.
And so, these are all ambitions and objectives we have as a Company that we need to manage every quarter. We consider these things every quarter and consider the outlook going forward. Indeed, we have various levers at hand. We continue to manage them. As you see that we’ve been on the low end of our capital spend, that reflects good discipline, a prudent approach. It also reflects the substantial improvement we’ve been able to achieve from a capital efficiency perspective. And that lever will continue to be pulled. We continue to dispose off assets that we think no longer fit our strategy and portfolio. We have a number of closed in the quarter that were very important from a strategic perspective, but also importantly from a cash flow perspective with some $4 billion in divestment proceeds coming in, in the quarter. So, indeed, all of these levers will be pulled. And we may end up in a very positive place at the end of next year because the macro’s reasonable and these levers are pulled effectively.
What we’re simply pointing out is that the macro, we’ve experienced it in the last couple of quarters, and there’s reason to believe that that could continue into 2020. And if so, the $8 billion to $9 billion is a considerable amount for us to manage in a kind of five-quarter basis, which is, what we have until we get to the end of 2020.
I think, if our targets weren’t — or our outlooks on gearing and share buybacks weren’t so specific in terms of one quarter, one moment in time, I think, this discussion would be less necessary. We’re going to, I think, very well manage the balance of these objectives through time. We can continue to do that. We’re just simply signaling in terms of when we get to the end of the fourth quarter of 2020, if the macro environment remains beneath what was originally premised, that provides some challenge to us. But, it’s a pacing challenge. It’s not an intent challenge. But it’s simply — these things will need to be re-paced. And that’s what we’ve always signaled in terms of the conditions in which we would deliver against. So, in that sense, there’s really — there’s no change, it’s just a recognition that the macro environment matters and has an impact now and potentially in 2020.
Going forward to the 2025 and the outlook we provided in June, again, that was similar price premises. So, the macro will matter for those numbers as well. And that’s always going to be the case. And indeed, if you look at the numbers that we presented, that’s getting organic free cash flow to $35 billion, we’re looking to get from $28 billion to $33 billion in the next year. So, if you think about growing the Company from $28 billion to $33 billion to $35 billion, I think that’s in a reasonable expectation over the next five, six years.
And again, if you think about the shareholder distributions, 125, over five-year period, that’s 25 a year, and we’re delivering that this year essentially, in a reduced macro environment. So, I think hopefully, the relationship to where we are today and where we say we will be in 2025? I think, there’s a pretty straight line connection between those things that make — that can provide confidence in terms of why we believe those numbers are achievable, going forward. On the gearing side, I’ll just say that it’s a balance between these things, and it’s always contingent on a macro environment. What we’re signaling again is in this macro, it will take a little bit more time to get to the 25% number.
Ben van Beurden
One more add from me, only it’s a small one, which is that, yes, of course, we do have contingency and margin in the numbers, we always do. It’s never wise to promise to the limit of your ability. So, rest assured that there is also margin in the 125 outlook that we provided, as there was also margin in the outlook that we provided for next year. And the evidence for that is, I think, pretty straightforward. We put some quite significant ambitions out there in terms of capital reduction, OpEx reduction, divestments, cash flow growth, et cetera. We have comfortably delivered on all of that, which was essentially, of course, in the knowledge that we had margin to maneuver. The buyback number we mentioned at that time, for those who have good memories or make good notes, we said will do $25 billion of buybacks, when the oil price gets back in our planning range of $70 to $90. That was the statement at the time. We have not really been that much in the planning range. But nevertheless, with the margin available to us, we have been able to make very significant progress and possibly could conclude to $25 billion outside the planning range for the oil price that we had back in 2016.
So again, evidence that we do not promise to the limit of our ability. We are prudent when we make outlook statements, and that is no different for 2025.
Thank you. Next question?
Next, we will hear from Lydia Rainforth with Barclays.
Thank you and good afternoon. A couple of questions if I could. I apologize going back to the buyback. But, on the — given the change in outlook for the macro side, can you just — are you going to take CapEx down towards the low end of range for next year? So, effectively, if we’re looking at changing the buyback program or slowing the buyback program down, do you also look at a balance of slowing down the CapEx side? And as you — just coming back to the previous question around, if we’re leaving $8 billion to $9 billion of cash flow on the macro side, that’s effectively all of the buyback you would need to do next year. So, is it that we don’t get any buyback — just to clarify that? And then, sorry, just one related to the business, I know that’s three. Just can you talk about 10% higher global non-fuels margin in the retail business? What does that actually amount to in terms of millions of dollars? Thanks.
Great. Thank you, Lydia. So, your first question was asking around the relationship of the capital program against these macro and potential share buyback implications. As I indicated in the last question, last response to last question, indeed, we are looking to find the right balance in terms of achieving objective of continuing to invest in the Company and ensure the long-term health and growth of our cash flows. So, that’s what underpins everything, while continuing to strengthen the balance sheet and increase shareholder distributions. And we need to find that balance each quarter and more importantly through the cycle.
What you’ve seen is in weaker environments, we’ve been able to I think effectively manage our capital at the lower end of our range. We’re at the low end of the range for 2019. For 2020, a range is $24 billion to $29 billion. We always have a certain amount of flexibility and choice through the year that we can manage effectively, should things turn suddenly. But, for the most part, we’re trying to not be overly responsive to any given one quarter and manage through the cycle to ensure that we’re making not value-destructive choices kind of in the last minute. That’s part of kind of the nature of the messaging that we’re sending today is this signaling prudence that we can see some headwinds and that we want to manage that effectively. So, we will look at capital, we will look at the pace of the share buybacks, and we will look at the de-gearing and ensure that we’re managing all of those to the best to our ability for the right outcome, from a value creation perspective, and from a financial framework perspective. What that exact balance will be will depend on what we deliver in the quarter and what the outlook looks like at that moment in time.
As I said, we do have some flexibility that we can use throughout the year. In terms of kind of the macro and the numbers, yes, it is $8 billion to $9 billion is the impact in terms of cash flows that we’re looking at. Again, there’s not one to one correlations, there’s a lot of elements in the decision-making process and how we manage that. Again, we’re looking to fulfill the commitments on the buyback program. And in the right macro conditions, we can make that happen. If that’s not the case, then, we’re going to have to find the right balance. Where that balance will end, we’ll have to see at the moment in time because it will be a function of the actual macro we’re experiencing and the expectations for the coming quarters.
In terms of the exact contribution of the retail margin, I’d say that let the team get back to — the important piece here is that we’re, one, we’re being responsive to our customers and innovative in our product and service offerings that I think will create differentiated returns for that part of our business, but also create more resilient returns as well as this becomes — cash flows that aren’t necessarily tied to a commodity. So, it’s part of our overall energy transition story, how do we provide products and services to our customers that they want and need and will create differentiated returns, but also create a different kind of resilient cash flows in our portfolio. We expect to grow that materially through the years, but we can let the team let you know more about the specific numbers.
Next, we’ll hear from Jason Gammel with Jefferies.
Couple more on the cash cycle, I’m afraid. You’ve mentioned a couple of times, Jessica, about eventually getting back to a growing dividend. My recollection is that line of sight on — I believe the $25 billion buyback and getting the gearing ratio down were essentially necessary before we could expect dividend progression. So, does this essentially mean that dividend growth has also been pushed back? And then, second, tactically, why did you maintain the pace of the buyback program for the upcoming three months? If you’re already seeing these headwinds, what led you to not being more prudent today, just in terms of that pace?
Thank you, Jason. So, indeed, we have indicated — well, first of all, we recognize dividend per share growth is — matters in terms of our world-class investment case and that will be part of the investment case going forward. And in terms of when that should happen? In the best way that should happen, again, to recognize that we are the – we distribute a substantial amount of cash to our shareholders today, both in the form of dividends and in share buybacks and indeed can get to some $25 billion by the end of this year or 10% essentially of our market capitalization. So I think we’re doing a pretty extraordinary job in terms of returning cash to the shareholders. However, again, dividend per share growth does matter.
Getting our — the $25 billion commitment behind us was — is an important milestone for us. But also what’s important to us is ensuring that our dividend growth is sustainable and linking dividend per share growth with buybacks to ensure that we retain the right levels of dividends on a go forward basis. So, that’s — those are the things that we have in mind in terms of the considerations of — does dividend per share growth matters, yes, it does, in terms of how that will be worked, we’re focusing on completing the buyback program and then willing to grow dividend per share in the coming years.
In terms of the decision around the buyback this quarter, I think, again we’re signaling expectations around what the outlook may look like in 2020, we don’t know, what will happen in 2020. If you just look at the oil prices alone, in 2019 we started off at $55; we then went up to almost $80 at one moment; then, came back down to 60s and at some point in the 50s in last quarter. So, it seems premature to conclude that this macro environment is destiny. So, this is just a signal that the macro, if it does continue, will make the pace — will have to slow the pace on the buyback and gearing program. But, that’s not to say it’s inevitable. And so, I thinking, making a different decision at this moment in time is to say that that’s inevitable. And again, I’d point back to the quality, high-level of cash flow generation of the Company that supported the share buybacks this quarter. And so, there is a lot of reasons for optimism and confidence and the level of cash that the Company can generate and its ability to meet these targets through the cycle. This is simply a recognition that the cycle may be at the low end going into 2020. And if so, it will have implications.
Ben van Beurden
Let me add something to it as well, Jason, particularly your second point. Why we continue with the buyback program this quarter is simply because we can and we should. Let’s also be very clear and also a little bit responding to an earlier question from Lydia. I also do not want to leave any impression that we somehow have come to the end of the buyback capacity in the Company, far from it. And as a matter of fact, if I — if you would — at this point, if I say, well, you know, abundance of prudence or an extreme abundance of prudence had to stop. What to do with the cash? At this point in time, it makes eminent sense to buy back our shares. Our equity is very, very cheap. That particular funding is very expensive. And as a matter of fact it got cheaper today. So, we have to just act on this original intent of buying back the $25 billion, for as much and as long as we can, and that’s what we’ll be doing. And I hope that we will be at $25 billion at the end of next year.
I certainly agree your equity is cheap. And thanks very much.
Next, we’ll move to Michele Della Vigna with Goldman Sachs.
Thank you. It’s Michele here. Ben and Jessica, moving away for one moment from the buyback debate, I was wondering when you look back at the seven key tools that you have to reduce the net carbon footprint by 2035 by 20% and you look at all of the progress that you’ve made over the last two years, which areas do you find are progressing more slowly than you would have wished, and which ones instead are progressing fast, and you find — have laid you to move faster than what you expected in the decarbonization path?
Great. Thank you, Michele. I appreciate the different profile question and the focus on the net carbon footprint, which is really important to our long-term strategy as a company. I’ll start with some of the highlights from the net carbon footprint and that approach and the impact that it’s having on our strategy and the Company. I think, some of the highlights would be what we’re doing in the nature-based solution space and how that’s playing into, not just as a kind of a standalone activity in the organization, but how do we embed that in the way we serve our customers and our retail business, I spoke a little bit about today, but also looking to achieve similar things in different parts of our business and kind of reduce carbon footprint for LNG cargos, et cetera. So, I think this thinking, this approach is really getting more deeply embedded in the strategy of each of our businesses, and is having a positive impact — effect in terms of innovation and creating, as I said, new solutions and product offerings for our customers.
I think, we’ve made some really good progress on power agenda. I’m pleased with the nature and quality of the acquisitions we’ve made in terms of securing important positions across the value chain, power value chain in the UK and the U.S. and Netherlands. I think, there’s some really interesting opportunities for us. We still — it’s still very much early days, but in terms of the types of things we’re hoping to secure and the types of positions we were hoping to secure and be able to knit those together and new and innovative ways to create solutions for customers and hopefully create differentiated returns, ultimately, I’m encouraged by the progress we’ve made over the last couple of years.
I think, it’s — one area that comes to mind in terms of an area that continues to be hard work would be probably carbon capture and storage. There’s a lot of effort going on in the organization to try and bring those types of projects to reality. And finding the right regulatory and policy levers being in place to make that happen and allow — support viable business models is a challenge. And it’s not that we’re deterred by a challenge. But, I would like for that to be moving more quickly. And I think it’s an area that across society and with governments and regulators, we need to continue to focus hard to make that more of a reality sooner because it’s important part of the solution, not just for Shell but for the planet.
Ben, do you want to add anything?
Ben van Beurden
No, I think you covered it very well. Thanks.
Next, we’ll hear from Henry Tarr with Berenberg.
So, if you were successful in the transfer of rights auction in Brazil, I guess, that would bring or require sort of material signature bonuses. I wonder whether that’s also got a bearing on the buyback here as an alternative use for capital, or should I think about that entirely separately?
And then, just secondly, gearing clearly is key. You’re not too far away from the 25% as we stand. But, I wonder whether there’s anything that we’re missing on equity movements through year-end. So, any view on the longer term or price assumptions and potential asset impairments, which could make getting the 25% a little bit more challenging, or are you focusing purely on the net debt side in your comments today? Thanks.
On the first question, in terms of the transfer of rights option in Brazil and what that means from a capital program, I would put that in the, first of all, the larger discussion around how do we allocate capital and how do we ensure we put our capital where there’s the most attractive opportunities. And I think, that’s the — the first part of the conversation, we need to ensure that we continue to invest in the long-term health of the Company and grow our cash flows. This would be a potential area where we could do that. We’ve got a great position in Brazil. We’re already a leading player in Brazil. We’ve got a number of great growth opportunities in the portfolio and in the funnel, and that opportunity will need to compete for capital, like any other opportunity.
On the larger question, of course, I’ve spoken a bit, it is one of the levers, we need to find the right balance between how we allocate our capital between growth, the balance sheet and our shareholders, and again, we’re continuing to find that balance. We will continue to invest I expect in the coming years in growth, and we will look at that opportunity in the context of its competitiveness versus other options in our portfolio.
On gearing, indeed, there are things that are happening on the equity side. There’s things that have happened on the equity side in 2019. It’s worth remembering, the IFRIC accounting decision at the beginning of the year brought on liabilities of our partners on to our balance sheet that went out actually liable for that created 0.4% impact on our gearing rate this year. In addition, with the declining interest rates that then causes a recalculation of our pension liabilities that flows through OCI and that also has an equity impact. And that’s — some 40 to 50 basis points impact as well from those equity movements. So, indeed, when you look at gearing in Q3, it went up slightly, while net debt went down slightly, and that is because of the movements that happened on the equity side.
Going forward, I do not have impairments on my mind at the moment, so that’s not a consideration. But, indeed these other things that do have on happen on the equity side are relevant and we look at a range of metrics when thinking about the strength of our balance sheet, gearing being one of them, net debt another, as well as other metrics as well.
Thank you. Next question?
Next, we’ll hear from Jon Rigby with UBS.
Yes. Hi, Jessica. Hi, Ben. Two questions. The first is, I think you referenced this during your remarks. But, certainly against my numbers, if I was to go back to the start of the year, it looks like the Upstream has been underperforming, I think it did in 2Q, and it feels like even adjusting for the expiration write-offs, it’s underperformed in 3Q. And it’s a big contributor to your free cash flow numbers for 2020 and beyond. So, are you able to just, a, confirm that’s true, and maybe sort of point out where the problems are being and when are they being addressed or how are they being addressed and the timing on that? And then, the second is obviously disposal, part of the cash inflows that you get. Does the reduced macro that you reference also potentially mean that that is a source of cash that may dry up over the next 12 months to 18 months, so, you’re confident that you can keep sort of disposal pipeline going? Thanks.
Great. Thank you, Jon. On the first question, in terms of the Upstream performance and the strength of it, it has not been achieving its full potential over the last three quarters, and I believe I made some statements about that in the speech as well. The relatively weak performance that we’ve seen has been in the Gulf of Mexico and to some extent in the UK as well, and a couple of other places. There is also strength in the portfolio. So, it’s not everywhere. But, unfortunately, it is happening in places where we have relatively high cash margin barrels. So, they matter. And I can assure you that it’s getting the full attention of leadership because we recognize the value related to that — those assets. And in fact, we are seeing improvement through — from Q2 through Q3 coming through. And we expect that we should be able to address those issues going into 2020. We need to do it, but there’s the expectation that we can get those assets to the level that they should be operating and generating even more cash for us.
On the divestment side, I think that you were saying disposal, but I believe you’re asking about our divestment program and how that’s progressing and if the macro environment may have a have an impact. Again, we’ve — overall, I think — I don’t know if it’s — not necessarily pleasantly surprised, but I think the overall divestment program over the last three or four years in all kind of macro conditions, I think has gone very well for us. And we continue to deliver against our strategic and portfolio objectives. As mentioned, a number of important assets closed in the quarter, generating some $4 billion in cash.
So, while I don’t think we can be completely immune to it, and yes, there should be some impact at some level, throughout the cycle over the last few years and in different price environments, we’ve been able to achieve the ability to sell the right assets and at the right price. So, I’m not overly bullish, but I’m not concerned in terms of the nature of the assets that we’re selling and our ability to conclude those over the next couple of years.
Next, we’ll hear from Irene Himona with SocGen.
I wanted to ask for an update, if possible, on the auction of the Dutch renewables utility, Eneco. Where are you in the timeline? And should you be successful, do we think of this as part of your CapEx, or is your thinking around the process influenced by the current micro situation? And then, my second question, can you give us a sense of what you’re seeing your Asian businesses? You have extensive operations out there. What does the macro look like in the region, please?
Thank you, Irene. So, the Eneco process is — bids are due in the coming week. So, that’s in terms process perspective. Of course, we don’t comment on any of these processes for a variety of reasons, commercially sensitive, et cetera. So, I won’t speak specifically to it. What I would say is that, yes — and should there be an acquisition, that would be part of our capital program. And of course, we’re taking into consideration, as we do, whether it’s the transfer of rights or any other capital choice that the first protocol is it the right strategic choice for us, does it have the right value risk proposition. And then, of course, we do look at kind of affordability, but we do think about affordability over a longer time period. If there is something that is of strategic and portfolio priority for us and the right value and risk proposition, I think we need to consider those things seriously.
But of course, that’s all within the context of everything we said before, which is we remain committed in terms of our organic free cash flow outlook, about our share buybacks and our gearing. So, all of these things remain true. And anything that we are looking to do from a strategic perspective needs to fit longer term in that context.
For the Asian business, I’d say that — I mean, overall where we’re exposed or where we see kind of our activities in Asia, certainly from a Downstream perspective and also from an LNG perspective, I’d say, in general, things are relatively strong. But, some signals, as I believe I mentioned earlier, in terms of what we’re seeing in the Chemicals market and overall kind of demand levels and volume implications and price margin implications associated with softening demand would be some of the trends that we’re seeing and certainly playing into our mind when thinking about the overall health of the economy and how things may look in 2020.
Again, it’s not a foregone conclusion, but there is some signals that there is some softening happening I think as outcome of some of the trade wars. And as I mentioned earlier, a general sense of a softening from a GDP growth perspective, and we’re certainly seeing some signals of that in parts of our portfolio.
Next, we’ll move to Dan Boyd with BMO Capital Markets.
Hi. Thanks for taking my question. Jessica, I had a question on the normalized organic free cash flow that you post in the slides, I think it’s slide 10. And I noticed that it came down about $3 billion versus the 1Q and 2Q run rate. So, I just wanted to confirm, is that primarily due to higher organic CapEx? And just wanted to get your thoughts on the outlook there over the next couple of quarters, especially as CapEx might be increasing. Are there other offsets that could either keep that number at the $21 billion, or increase it? And then I just wanted to confirm on the macros or the impact of I think the $8 billion to $9 billion, is that based on the current spot prices or is that based on the forward curve? Thanks.
Okay. So, first question in terms of the outlook, I want to make sure I understood the question. So, it’s — on a normalized basis, there is a question around whether capital was contributing to that. And it’s not a capital story. So, this just a four-quarter rolling basis, I think if you — it’s relatively straightforward if you look at the numbers in terms of how you get to that number. There is nothing unusual happening from the capital side. And as we already — as I indicated in the speech that we’re going toward lower end at the lower end of the capital for the year. So, it’s not a capital story.
On your second question, in terms of the macro environment, what that’s reflecting is what we’re experiencing in 2019, on the Downstream side, particularly in the second quarter across both the refining and the chemical sector and in the third quarter some softness in the refining, a bit of an improvement but still relatively soft. And certainly on a Chemicals side, particularly soft.
So, that’s what we’re experiencing today in the Downstream business. On the Upstream business, it’s looking at the oil price of $62 for the quarter. And also particularly for the Upstream business the gas and MGL realized prices in places like North America and Europe playing through into the numbers. That’s the macro we’re experiencing today. And then, if you think about is that going to continue through 2020. If you bring that all together and assume that that’s what the world looks like more or less, then you have a cumulative impact of some $8 billion to $9 billion on our cash flow.
To make sure I understand. So, I thought that that $21 billion on the slide was already normalized for the price changes. And so, I was assuming there was something operationally that drove the decline from $24 billion to $21 billion, but you’re saying that actually the macro conditions are the primary contributor of that sequential decline in the rolling numbers?
So, I’m not sure — we may not be fully understanding your question, and so IR can follow up with you. Prices are normalized in the four-quarter rolling basis to be at the RT ‘16 $60 number. So, that can cause, depending on what the cash flow was based on any given quarter. So, if it was a bomb, let’s say if it was at 68 or 69 in a given quarter, then there would be a price adjustment down, and the inverse as well as. If in a given quarter, the amount is for below the RT ’16 $60, then you would have an adjustment up, so that it’s all normalized to that RT ’16 $60. So, that’s what’s underpinning the numbers. But, if you need further guidance in terms of how we’ve made the calculation, then we’ll have IR follow up with you.
Yes. I’ll follow up. I think, we might be misunderstanding each other. But, thank you for taking the question.
Next, we’ll hear from Martijn Rats with Morgan Stanley.
Hey, Jessica. Hello, it’s Martijn here. I just wanted to ask you two things. First of all, I briefly wanted to revisit the math on the sort of $8 billion to $9 billion or indication that you gave. So, if I can, sort of mention a few numbers, sort of my understanding of it is that so Shell’s sort of planning assumption is free cash flow of $28 billion to $33 billion next year. So, if you take the midpoint of that, take $30 billion. If you then subtract sort of interest payments, 4 to 5, you end up with $26 million. If then commodity prices and Downstream margins do not improve, we can take away the other 8 to 9, which then ends up with about sort of $17 billion of free cash flow after interest payments versus a dividend that is 15. And I can totally understand that in those — in that scenario, you would not be keen to do any buybacks. And I was wondering if this is sort of the math that you’re trying to sort of steer us towards.
The second point that I wanted to ask is about the sort of replicability of the trading gains. Because when we think trading, we typically think just volatile and hard to replicate, but there might be some structural elements to it around sort of IMO or some LNG price, sort of differentials that are sort of interesting. Could you sort of give any hint on how you see the sort of trading and optimization sort of contribution developing into the fourth quarter and the early parts of next year?
Thank you, Martijn. So, in terms of the math, of course, we’re looking at this on a five-quarter basis in terms of the cash we’re going to generate when thinking about getting to the end of 2020. So, that’s just in terms of how we’re thinking about the numbers. We end up in a slightly, I would say, somewhat different place, but in terms of the nature of the thinking, big picture, I think that’s — it’s not unreasonable. But, in terms of the actual end position, on a go forward basis in terms of where we are today and where we would like to end, I’d say the numbers are slightly different.
The important piece is again wanting — the focus could be on a couple of things. One, recognizing the strength of our underlying cash flow of the Company of $6.6 billion in a relatively weak quarter for us, both from the Upstream side and the Downstream side. So, to get to the 28 to 30 is a reasonable expectation in a right macro, and again with the Appo and Prelude projects ramping up and continued support of marketing business growth that the underlying cash flow remains — should have confidence in terms of the growth of that cash flow. We then need to ensure that we’re strengthening the balance sheet. That will be a priority for us going through 2020. And in the right macro environment, our ability to continue at the pace that we’re at is very possible. And the challenge here is that the macro is exactly where it is today or worse, the pace of getting both the gearing and share buyback exactly where we would like it to be in the fourth quarter of 2020 is challenged. And this is just a pacing issue and a macro issue. Depending on where macro is, that may or may not be an issue. If it’s not where it needs to be, then we are going to ship that out past 2020. And if it is where it needs to be, then hopefully that isn’t the case for the share buybacks.
On the trading side, in terms of structural, a couple of things. I think, it’s important to reflect on the chart that I referred to earlier in my speech in terms of the differential that you’re seeing between JCC and JKM. I think that is relatively unique. You see that over time that widen considerably in the third quarter that definitely contributed to the strong results. And in that sense, that is not structural. That is a moment in time in terms of what the market is doing. What is structural is the strength of our portfolio, the strength of the contractual underpinnings that we have in that portfolio that gives us some ability to optimize, and of course the trading capability itself, which is a strength that we continue to leverage.
I would look at Integrated Gas and kind of on a rolling four-quarter basis to get a sense of the normalized Integrated Gas view going into 2020, Q3 was an exceptional quarter. I certainly hope we have more quarters like that, but I think it was relatively unique market conditions that supported that outcome and of course the team did a great job as well.
Things like IMO, I think, you referenced as well, in terms of what structural around that, I think that remains to be seen. I think, there is various things that are going on the market with the change in the fuel standards and other things happening in both the crude and products market that again our trading organization was able to help to optimize and benefit from.
Again, I would look at kind of a four-quarter rolling basis when thinking about 2020, and I wouldn’t necessarily say that everything that was achieved in the third quarter is necessarily structural going into 2020.
Ben van Beurden
Hey, Martijn. Just one point on the math, because I know you would like to replicate what we said. So, the $8 billion to $9 billion that I mentioned is $8 billion to $9 billion over the period ’19 and ’20. If you just look at ’19, the first half of this year, you could argue to all intents and purposes would be at sort of the cycle average conditions that we would expect and reference that. But therefore, the $8 billion to $9 billion is really the cash that we expect to lose, if nothing would change in Q2 — sorry Q3, q4 and the entire next year. So, that’s a six-quarter number that we are talking about here. So, if you subtract that number just from next year, I think you would be overdoing it a little bit.
Next, we’ll move to Peter Low with Redburn.
The first was just a follow-up. Can you help us better understand, which takes precedence in your financial framework, the 25% gearing target or delivery of the $25 billion buyback? So, for example, would you be comfortable letting gearing stay at current levels, which is not that high, if it allowed you to complete the 2020 buyback on time? And then, secondly, just on the $5 billion of incremental cash flow from new projects by the end of 2020. Are you able to give us some more detail on some of the larger components of that beyond Appomattox and Prelude, which has been well flagged? Thanks.
So, in terms of the kind of precedence for — or preference, this is always a bit of a challenge, of course, because we want to achieve kind of all three of our objectives that we’ve spoken to a few times today, which is to strengthen the balance sheet, increase shareholder distributions, reduce dividends, shareholding counts and grow the Company. So, all of the things we’re looking to achieve through the cycle.
In terms of how we’ve framed our financial framework and our priorities, we’ve talked about strengthening the balance sheet. That remains a priority for us, and we’ve made good progress over the last couple of years. And we’ll look to continue to make progress to get down to the 25%. What you saw in 2019 was that the gearing actually went up a bit from 2018. And that was that was okay. We ended 2018 relatively low because of the windfall from working capital as prices went to $55. So, we fully expected it to go up a bit in 2019, and then continue the trajectory down towards the end of ’19 going into 2020. And that’s important for us in terms of strengthening the balance sheet. But, it doesn’t need to be a specific number at a specific moment in time, we really need to manage this through the cycle through quarters and manage towards a trajectory. And as we do that, each quarter, we’ll consider kind of the current environment, we’ll consider the most recent view of the outlook when ensuring we’re finding the right the right balance between those objectives through time. But, at the end of this and the next one to two years, we should end up in a place where we’re achieving — with the right macro conditions, we’re achieving the gearing balance that we hope to achieve of 25% that we have the share buybacks completed at 25, and we continue to invest in the long-term health of the Company and grow cash flows.
In terms of the $5 billion in projects, important contributors are Prelude and Appomattox, as you’ve referenced. In addition, we have a number of other assets that are continuing to ramp up. Some of our assets from Brazil are still ramping up from, some of the FPSOs that have come on stream, and there’s another further one that’s going to come on soon as well. I talked about some of the other projects that came on — that started up in the quarter in Nigeria, Malaysia. Those will also contribute to increased cash flow. In our Downstream business we started up some the projects in our Chemicals business in the last year, there is some ramp up from those assets as well. And of course, our Marketing business, which we are continuing to grow, where you saw between 2018 and 2019, our marketing business grew from $1 billion to $1.5 billion in earnings, just to give a sense of the growth potential in that business as well.
Thank you very much.
Next, we’ll move to Christopher Kuplent with Bank of America.
Thank you. Jessica and Ben, please help me with my confused state, because in the end, I’m hearing that share buyback announcements are made on a quarterly basis. At the same time, I understand, this is all about a glide path. So, if you’re giving us a warning about at current conditions your 2020 target is being undershot, why are you not stopping or reducing buybacks, when we are seeing those spot conditions before you see additional up to $5 billion cash flow contributions from projects next year or on the way to 2020. So, I can’t quite marry that together. That’s question number one.
And question number two, I welcome the trading statement that you issued but I’d just like to understand a little bit what you think consensus was missing. And the strong oil products trading results that you reported, whether you have known about them, whether you would have made them definitely visible on that trading statement if you had another opportunity? Thank you.
Great. Thanks you, Christopher. On the first question in terms of trying to reconcile, potentially different perspectives in your mind, and the quarterly basis and the glide path. I think that’s right. So, we are every quarter making a choice in terms of the amount into share buyback, and we do that in the context of where the business sis today and where we want the business to sit going forward, and particularly with respect to very-specific targets that we set for 2020.
For me, there is — obviously, there is coherence in what we’re doing. It is a glide path, it is a trajectory. We look at the strength of our cash flow today, the strength of our balance sheet today, and our expectations of how our cash flow is going to grow over the coming year, and based on that view make choices around what is the right allocation for our capital program, for our balance sheet and for the share buyback.
As we said a number of times, what we’re signaling today is somewhat a weak macro that’s affected our results in 2019. And if that macro continues, then, that would have an impact on the pace of how we’re doing the degearing and the share buybacks. Nothing more, nothing less. The health of those cash flows is very strong, the health of the balance sheet is strong, but it’s simply recognizing that there are conditions outside of our control that could have an impact on our cash flow. And if that’s the case, we will potentially make different choices as that emerges. But, we don’t know if that will emerge. It’s just in the same way that we’re seeing very different environments, both in the Downstream and the Upstream business in 2019 alone.
So, to conclude that that’s inevitable at this moment in time, I don’t think it’s necessary. But, to be transparent in terms of how our views are evolving with the conditions that we’re experiencing and the signals that we’re seeing in our businesses, we felt it was appropriate and prudent to mark that these things are affecting our business today, could potentially affect them in the future and therefore, may lead us to make different conclusions in terms of how that allocation happens in 2020.
On the trading statement, hopefully you found that useful. And the objective really with that was to try and provide increased inside insight and transparency in terms of things that were happening in the quarter that were observable and able to share with the market that would be difficult for the market to see on their own. So, things like the well write-off in Kazakhstan is a good example of that. And providing that information and also seeing how the trading business is affecting, both IG and the downstream business, again, that may be difficult to observe and sharing that with the market so that there is a higher — a better understanding to enable, perhaps better insight when assessing and determining the consensus for the Company.
So, I’m pleased that we made that step in the quarter, I think it’s been helpful for the market. And I expect we’re going to continue to do that and look to improve and see where further potential disclosure is helpful or if there’s some way we need to modify it. But the idea is to continue to support the market and understanding where the Company stands and what to expect from the Company.
Ben van Beurden
And Chris, just to help a little bit more with what you yourself said was a confused state. It is actually quite straightforward. If you look at our results and if you look at our track record and if you do sort of the rule of thumb calculation that no doubt many of you are doing, you could also make the case that we should not make any statement that we just carry on as we are because we have the capacity to do so. And there is in that sense, no relation. And the fact that we say, listen, hold on, the macro does actually have an effect on our cash flow is obviously a statement of the obvious. So, we could also have said, well, that’s hopefully all understood, isn’t it? But not making a statement of the obvious is also making a statement. And I think, if somewhere in the quarter of 2020, we would face a macro that would be as bad or even worse than it is today, and at that point in time, we would say, well, obviously, you know, I hope it doesn’t come as a surprise, we also wouldn’t want to be faced with a situation as he said, why couldn’t you see this coming? Why didn’t you make a statement of the obvious a little bit earlier on? And that’s essentially what we are doing. So, we’re not flagging anything. Again, no difference of intent. We are making a statement of the obvious at this point in time, which I think is what we should be doing as responsible communicators with the market.
And due to time running out, our final question today will be from Lucas Herrmann with Exane.
Look, one simple one that I wanted to ask. European gas production, there are lots of moving parts, whether it’s Norwegian shut-ins or issues in Groningen or by the sound of things, issues you may be having in the UK. But, can you just give us some idea as to why the number was as soft as it was this quarter, the lowest that I can remember? And to what extent you might expect volumes to come back over and above the typical seasonal effect? That was it.
So, I wasn’t sure if you’re referring to European gas production as a sector or the Company. I’m assuming you’re speaking about Shell specifically. So that’s what I’ll speak to indeed. You mentioned Groningen having an impact, that is relevant, but also some of the softer areas of performance in our portfolio were also relevant, places like in the UK and Norway also contributed to that lower level. And of course we are hoping to address some of those issues and bring it to different place. Groningen’s different circumstance, and also, weather has role to play as well.
With that, I believe we are at the end of our session today. Thank you, everyone, for your questions, and for joining the call. The fourth quarter results are scheduled to be announced on the 30th of January 2020. There will be webcast call rather than a face-to-face event. Both, Ben and I will talk to you all then. Have a good afternoon.
That will conclude today’s call. We thank you for your participation.