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Royal Dutch Shell plc Management Day November 2015

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LONDON, November 3, 2015 /PRNewswire/ —

NOT FOR RELEASE, PRESENTATION, PUBLICATION OR DISTRIBUTION IN WHOLE OR IN PART IN, INTO OR FROM ANY JURISIDICTION WHERE TO DO SO WOULD CONSTITUTE A VIOLATION OF THE RELEVANT LAWS OF SUCH JURISDICTION.  

  • Competitive underlying performance in low oil prices – planning for prolonged downturn 
  • Both net investment and dividends have been covered by operating cash flow over the last year to Q3 2015, when oil prices have averaged $60 per barrel 
  • Delivering our commitments to reduce costs and spending – $11 billion reduction in 2015 
  • Reorganisation of Shell upstream increases accountability for performance and aligns us to deliver on the strategy  
  • Further analysis and Shell’s integration planning for the recommended combination with BG has enabled us to identify a $1 billion (40%) increase in pre-tax synergies to $3.5 billion 
  • BG transaction on track for completion in early 2016, leading to a simpler and more profitable Shell  

Royal Dutch Shell plc (Shell) (NYSE: RDS.A)(NYSE: RDS.B) today presents a strategic update to shareholders and investors in London. Speaking at the presentation, Shell’s CEO Ben van Beurden will say:

“Low oil prices are driving significant changes in our industry. I am determined that Shell will be at the forefront of that, and emerge as a more focused and more competitive company as a result.”

“BG rejuvenates Shell’s upstream by adding deep water and integrated gas positions that offer attractive returns and cash flow, with growth potential. These are industries where Shell has significant capabilities and technologies. With enhanced positions in both of these themes, Shell can focus on the best positions, and deliver a more structured and predictable investment programme.”

“We are re-shaping the company and this will accelerate once this transaction is complete. Upstream will be reorganised to increase accountability for performance, and to better align the organisation with the company strategy. Asset sales and hard choices on capital spending, such as the recent announcements to cease exploration in Alaska and the development of Carmon Creek heavy oil in Canada, all underline the changes that are underway. Integration planning for Shell and BG is progressing according to plan and today we’re announcing a 40% increase in synergies expected from the recommended combination.”

Van Beurden will conclude: “Shell is becoming a company that is more focused on its core strengths, a company that is more resilient and competitive at all points in the oil price cycle and that has a more predictable project development pipeline. We’ll grow to simplify.”

Reorganising Upstream to increase accountability for performance

Shell is announcing a new, simpler upstream organisation that reflects recent changes in the company’s portfolio, facilitates our planning for the integration of BG post-completion of the recommended combination and that will facilitate subsequent streamlining of the portfolio. The changes will come into effect on January 1, 2016.

Integrated Gas, which has grown into a business that generated over the last 3 years on average $11 billion cash flow-per-year from around $2 billion in 2009, will be established as a stand-alone organisation in a move that reflects both its enlarged scale and investment potential. It will be led by Maarten Wetselaar, who will become Integrated Gas Director and a member of the executive committee.

A new Upstream organisation will span Shell’s world-wide conventional oil and gas businesses. It will be led by the current Upstream International Director, Andrew Brown.

Marvin Odum, currently Upstream Americas Director, will lead and become Director of a new Unconventional Resources organisation, spanning heavy oil and shales activities in the Americas. This will include on-going reviews of portfolio and investment opportunities in these longer term themes, and the winding down of Shell’s activities in offshore Alaska.

As the recommended combination with BG moves towards completion, Shell intends to retain the best talent in the combined group.

Pulling levers to manage in the downturn

Shell is pulling all levers to manage through the current oil price downturn, underpinning our intention to continue to pay attractive dividends for shareholders.

These levers include:

  • maintaining a strong balance sheet, which had 12.7% gearing at end Q3 2015
  • delivering a 10% reduction in operating costs and 20% reduction in capital spending in 2015, together totalling $11 billion
    portfolio restructuring covering the upstream engine, shales, and oil products
  • $20 billion of asset sales for 2014-15 and a further $30 billion planned for 2016-18 (post completion of the recommended combination with BG)
  • delivering on material new projects with substantial cash flow potential.

Shell’s drive to reduce costs and simplify the company is gathering pace. We have now announced some 7,500 staff and direct contractor headcount reductions in Shell in 2015.

Shell is being highly selective on new investment decisions. We’re leveraging our Projects & Technology business’ capabilities and taking the opportunities presented by the downturn to reduce both our own costs, and costs in the supply chain. Capital efficiency gains in the Shell portfolio are expected to be some $4 billion in 2015-16.

Progressing with the recommended combination with BG

We are making good progress with the BG transaction, which should lead to:

  • Enhanced free cash flow – this combination enhances Shell’s dividend potential in any expected oil price environment
  • An IOC LNG and deep water leader – accelerating and de-risking our current strategy
  • Springboard to change Shell – asset sales and refocused spending would result in a simpler, more focused company, concentrated around three pillars – upstream and downstream cash engines, deep water and LNG.
    Pro-forma combined capital investment for Shell and BG in 2016 is expected to be around $35 billion in the current environment, with options to further reduce this spending level, should conditions warrant that.

A joint integration planning team has been established with BG, planning for a world-class integration once the recommended combination with BG has completed.

Synergy potential of the BG combination

Shell has been able, as a result of further analysis and its integration planning work, to de-risk its initial synergy estimates and increase the expected level of identified and reported on pre-tax synergies from $2.5 billion to $3.5 billion in 2018, an increase of 40% compared to earlier guidance. This increase is attributable to a doubling of expected operating cost savings from $1 billion to $2 billion and underscores the attractiveness of the recommended combination for both sets of shareholders.

The expected level of identified pre-tax synergies therefore now comprises $2 billion of operating cost savings and a $1.5 billion reduction in exploration expenditure in 2018.

Please refer to the Appendix to this announcement for further detail on these estimated synergies. These estimated synergies have been reported on under the City Code by Deloitte LLP, and by Shell’s financial adviser, Bank of America Merrill Lynch. Copies of their letters are included in Parts B and C of the Appendix. References in this announcement to those estimated synergies should be read in conjunction with the Appendix.

These savings are incremental to savings already planned by Shell and BG and which are expected to take place regardless of whether the combination completes or not.

Shell expects 2018 exploration spend for the combined group to be less than $3 billion, a 40% reduction from 2014 levels on a combined Shell and BG basis.

Financial Effects of the Shell-BG combination

Shell’s appraisal of the financial effects expected to arise from the recommended combination includes assessing BG Group’s intrinsic asset value and the net asset value (NAV) oil price breakeven, together with the impact of the recommended combination on cash flow from operations per share, earnings per share, and return on capital employed.

The significant equity component of the combination means that the effective offer price changes with movements in the share price of Shell, which is in turn influenced by factors such as equity market and oil price movements.

The NAV oil price breakeven for the recommended combination is currently estimated to be at mid $60s Brent prices, taking account of the transaction structure, current equity market conditions, reduced operating cost forecasts and capital expenditure over time, together with other factors, including synergies.

At the time of announcement of the recommended combination in April 2015, Shell stated its expectations for accretion to cash flow from operations per share from 2016, accretion to earnings per share from 2017, and a neutral impact to return on average capital employed in 2018, with potential for growth thereafter. These statements were made on a current cost of supplies basis, excluding identified items, and reflected the prevailing market view on oil prices at that time.

Since April, the prevailing market view on oil prices has fallen by $10-$15 per barrel on average over the period to 2018. Despite this, Shell’s assessment of the expected accretion for both cash flow from operations per share and earnings per share, and the effect on return on average capital employed, remains unchanged, and plans for share buy backs remain unchanged. This reflects the significant potential for creation of value for shareholders in the transaction.

The combination will be presented in Shell’s accounts under IFRS 3 and 13. This will result in an annual non-cash post tax charge to the profit and loss account through a step up in annual depreciation charges of approximately $1.5 billion. This figure represents a reduction from the estimate of $2 billion included in the announcement of the recommended combination dated 8 April 2015. The final figure will be assessed once the Combination has been completed, and is influenced by equity prices and other market factors at the time of completion.

Future dividend and share buybacks

Shell aims to balance cash inflows and cash outflows over the business cycle, and to finance competitive investment programmes and shareholder distributions irrespective of short term oil price fluctuations.

Our financial framework is highly competitive, with balance sheet gearing at 12.7%, similar to year ago levels, despite a halving of oil prices. Both net investment and dividends have been covered by operating cash flow over the last year to Q3 2015, when oil prices have averaged $60 per barrel.

The recommended combination with BG should enhance Shell’s free cash flow, enabling debt reduction, and further improvement in the company’s capacity to pay dividends and fund share buybacks. This is a major driver behind Shell’s intention to pay a $1.88 per share dividend in 2015, at least $1.88 per share dividend in 2016, turn off scrip dividends in 2017 and undertake a share buyback of at least $25 billion in the period 2017-2020.

Regulatory approvals on track

We remain on track to complete the recommended combination with BG in early 2016, and have received regulatory approvals from the EU, Brazil CADE, US FTC and other jurisdictions. Pre-conditional filing processes remain on track in Australia and China.

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