Royal Dutch Shell (RDS-A) Reports Q2 EPS of $1.22; Plans Job Cuts

Pulling levers to manage returns in the downturn

Today’s oil price downturn could last for several years, and Shell’s planning assumptions reflect today’s market realities. The company has to be resilient in today’s oil price environment, even though we see the potential for a return to a $70-$90 oil price band in the medium term.

• Gearing stands at 13% relative to 12% at end 2014, despite lower oil prices, reflecting good operational performance during the downturn and the introduction of the scrip dividend

• Operating costs are expected to fall by over $4 billion, or around 10%, in 2015, as our sustainable cost reduction programmes gather pace. We plan to reduce costs further in 2016.

• We are anticipating some 6,500 staff and direct contractor reductions in 2015

• 2015 capital investment is expected to be around $30 billion, a reduction of $3 billion since Shell’s last update in April, and $7 billion from 2014 levels, reflecting cost reductions, project cancellations and re-phasing of growth options. Overall this is a reduction of 20% from 2014 levels, and 35% compared to 2013.

• Shell continues to review both the ongoing projects under construction, and the medium term investment options, to balance returns, affordability and medium term growth potential

• Underlying performance in each of the focus areas of Resources Plays, Oil Products and the mature Upstream ‘engines’ business has improved compared with 2014, as we continue to restructure there

• Asset sales should total $20 billion for 2014 and 2015 combined, despite weak market conditions

• At the same time, Shell is continuing to invest in significant new projects, which should add material cash flow and free cash flow in the medium term

Progressing with the recommended combination with BG: ‘grow to simplify’

In April 2015, Shell announced its recommended combination with BG.

- Enhanced free cash flow - this enhances Shell’s dividend potential in any expected oil price environment.

- An IOC LNG and deep water innovation 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 engines, deep water and LNG.

• We remain on track for completion in early 2016, as planned. We are making good progress with the regulatory approvals process, including approvals received from Brazil CADE, South Korea FTC and US FTC. Pre-conditional filings have been submitted, covering Australia, China and the EU, and we are progressing well in other jurisdictions.

• A joint team has been established with BG to plan for a world class integration of the two companies once the transaction has closed, and to retain the top talent from both companies.

• Synergies from the transaction should be at least $2.5 billion per year from 2018, subject to the bases of belief, principal assumptions and sources of information set out in Appendix 5 to the announcement of the recommended combination.

• By combining Shell’s current complementary positions with BG’s LNG and deep water assets, Shell can add significant value – beyond the announced synergies - by applying its technology and know-how at greater scale, at a lower cost, concentrating on areas of existing competitive advantage, and through better optimization of the combined portfolio.

• Pro-forma combined capital investment for Shell and BG in 2016 is expected to be around $35 billion in the current environment.

• Shell expects $30 billion of asset sales between 2016 and 2018, as the combined portfolios are restructured.

• The free cash flow expansion expected from BG’s Australia and Brazil growth is a natural fit with Shell’s 2017+ free cash flow growth potential.

• This in turn enhances Shell’s continued intention to pay a dividend of $1.88/share for 2015 and at least $1.88/share for 2016, and reflects confidence in future financial capacity.

• Share buy-back of at least $25 billion expected for 2017-2020, subject to the assumptions set out in the announcement of the recommended combination, supported by the re-shaping of the portfolio we are planning, and enhanced free cash flow from the combination with BG.