Earnings Call Transcript
Shell plc (SHEL)
Earnings Call Transcript - SHEL Q2 2025
Operator, Operator
Welcome to Shell's Second Quarter 2025 Financial Results Announcement. Shell's CEO, Wael Sawan; and CFO, Sinead Gorman, will present the results, then host a Q&A session. We will now begin the presentation.
Wael Sawan, CEO
Welcome, everyone, and thank you for joining. Today, Sinead and I will present Shell's second quarter results for 2025. Starting first with the broader external context, the macro continued to be challenging on multiple fronts against the backdrop of geopolitical and economic uncertainty, we saw knock-on effects on both physical trade flows as well as commodity prices and margins more broadly. In spite of this, we delivered a robust set of results with strong operational performance while continuing to further our strategy and progress against the key targets outlined at our Capital Markets Day in March. Let's start with cost, where we have demonstrated once again that we will deliver what we say. In the first half of 2025, we achieved some $800 million in structural cost reductions. This brings the total since 2022 to $3.9 billion, putting us firmly on track for our target of $5 billion to $7 billion by the end of 2028. What I'm particularly encouraged by is the fact that the majority of these savings come from what we call non-portfolio reductions, essentially changing the way we work as opposed to costs that are taken out as part of divestments or other portfolio choices. We have delivered efficiencies throughout our operations in maintenance activities across our supply chains and in the corporate center. All of this has resulted in a cost takeout of almost $2.5 billion, which is more than 60% of the total structural cost reduction since 2022. Now let's turn to our portfolio, where we've also made considerable progress delivering on our strategy to strengthen our world-class businesses. A major milestone for us was the start-up of LNG Canada, in which Shell has a 40% working interest. Its strategic location on the country's West Coast brings feedstock advantages and greater marketing flexibility, including transit routes to Asia that are more than 50% shorter than those from the U.S. Gulf Coast. At CMD '25, we said that we will grow LNG sales between 4% to 5%, and LNG Canada is expected to play a big part in that, having shipped its first cargo in June. To support future growth, we also took final investment decisions on projects in Egypt as well as Trinidad and Tobago. These will increase feed gas supply to our leading LNG portfolio over time. We also said that we would grow production while continuing to sustain liquids. In the second quarter, we continue to do that, especially in our deepwater assets. In Brazil, we have some of our most competitive barrels in terms of operating cost and carbon footprint. This quarter, we started up Mero-4 and agreed to increase our working interest in Gato do Mato. In Nigeria, we deepened our interest in the Bonga field where we have been delivering top quartile operational performance. At CMD '25, we also said that we would high-grade our Downstream Renewables and Energy Solutions business, which we have continued to do this quarter. In Chemicals, we completed the divestment of the Energy & Chemicals park in Singapore, and in mobility, with a value over volume lens, we announced divestments of our retail networks in both Indonesia and in Mexico. So despite the more challenging macro conditions, we have been able to make important progress on our strategy. And with that, let me hand over to Sinead to provide some more details on our Q2 financial performance.
Sinead Gorman, CFO
Thank you, Wael. In Q2, we delivered a robust set of results in what was a more challenging macro environment than Q1, as Wael alluded to. Our adjusted earnings for the quarter were some $4.3 billion, and we delivered $11.9 billion of cash flow from operations. Integrated Gas and Upstream both delivered strong operational performance in a quarter with higher planned maintenance, weaker margins, and fewer trading and optimization opportunities. Chemicals & Products faced another challenging quarter, impacted by continued weak margins and unplanned downtime in Chemicals and a lower contribution from trading and optimization, which saw oil markets experience a disconnect between market volatility and supply-demand fundamentals. Marketing, on the other hand, recorded its best Q2 results in nearly a decade. Both Mobility and Lubricants had another strong quarter, with Mobility entering the driving season, benefiting from its portfolio high-grading, and an increase in premium fuels margin contribution. Now moving to our financial framework, our cash CapEx outlook for the full year 2025 remains unchanged, and we continue to prioritize the highest-return opportunities. Given our cash generation and balance sheet strength, we're announcing another $3.5 billion share buyback program today, which we expect to complete in time for our Q3 results announcement in October. This is the 15th consecutive quarter in which we have announced $3 billion or more in buybacks. At the end of Q2, our 4-quarter rolling shareholder distributions were 46% of CFFO, in line with our target range of 40% to 50% of CFFO through the cycle. And with that, let me hand back to Wael.
Wael Sawan, CEO
Thank you, Sinead. To summarize, we delivered a robust set of results in Q2 in a challenging geopolitical and macroeconomic environment. We remain focused on executing our strategy, transforming our portfolio, and delivering on our key targets. We're confident that our strategy is the right one. Every day, I see the momentum building across our organization to drive performance, discipline, and simplification in order to deliver more value with fewer emissions. Thank you.
Operator, Operator
Thank you for joining us today. We hope that after watching this presentation, you've seen how we continue to make meaningful progress on the delivery of our targets while strengthening our world-class portfolio. Today, Sinead and I will be answering your questions. We would appreciate it if we could have just one or two questions each so that everyone has the opportunity to participate. Let's start with the first question, please, Luke.
Matt Lofting, Analyst
A couple, if I could, please. I wanted to start with trading, but perhaps you could frame it in the context of the more challenged environment that you referred to in the opening remarks during the second quarter, how you see the outlook for Q3 and beyond on those trading optimization businesses? And if it's possible, perhaps break down the pieces between liquids and products and then gas in Integrated Gas. And then secondly, I just wanted to ask about the Upstream business. Another consensus beat in the second quarter this morning, something of a trend around that over the last 4 to 6 quarters. I wonder if you could sort of zoom in on the Upstream business, talk about what areas of that business stand out to you in terms of delivery and how sustainable you see that going forward?
Wael Sawan, CEO
Thanks, Matt. Let me start maybe with the second question first and then have Sinead address the first one. I'm very proud of the way the team has been responding in the Upstream space. Remember, this is a high-graded portfolio. Over the years, what we have done is really focus on trying to increase our cash flow per barrel, really focus on the basins where we have an advantaged position. Most recently, of course, there was a divestment of onshore Nigeria that's added to that portfolio high-grading that we have. So what's the team doing? We've been very focused on going back to what we call the brilliant basics. And what we mean by that is just the blocking and tackling that is required to be able to create value. It starts with reliability and availability, the operational improvements that we have, teams really getting into the rigor of all the operations we need. You've seen that come through, not just in operations but also in maintenance. Second quarter, of course, is one of the highest maintenance quarters typically for us, and the majority of our turnarounds or maintenance activities have ended either on plan, on budget, or slightly better. So really good performance. I've also seen a lot of drive to create that next level of competitiveness in Upstream. I was just in the U.S. last week and looking at the Gulf and our operations in the Gulf of America. A real focus these days on cost, how we optimize the supply chain, how we enhance our planning so that we can leverage a much leaner supply chain, whether it's shipping, trucks, or the like. All of this reflects a much more value-focused mindset while delivering safe outcomes. In every part of the Upstream organization, I'm seeing more and more of that, and that to me is a great signal of the culture change that we're seeing as we drive performance, discipline, and simplification in the company, Matt. Sinead?
Sinead Gorman, CFO
Indeed. And thanks, Matt. So with respect to trading, it definitely had a decent contribution for us across this quarter. So pleased with the results. You can't have sort of one homogenous conversation about trading because each of the segments contributes slightly differently. So let's take them one by one, which is what you requested. So in terms of our Renewables segment, it's pretty much the norm. You always see it at the sort of level for the seasonality that we see. With respect to talking about normal, really moving on to LNG, what we see with our Integrated Gas segment is really, this is more of the new norm. So this is where we are seeing volatility having changed coming out of the war. We saw a lot of volatility around the time of the Russia-Ukraine conflict; of course, this is more towards that norm. From our perspective, we have less volatility and a bit of a change in our portfolio mix as well. Moving over to our Chemicals & Products segment: with respect to Products, in particular, there are good results coming through. Traders are doing well, being able to take advantage of what they saw there. On the crude side, it came through a little bit differently. We saw just a disconnect between what was market volatility and what we saw in underlying fundamentals and therefore, had a prudent approach and chose to risk off slightly, which meant that we didn't have the same contribution we would expect to see coming through on crude as a quarter aspect. We would expect to see our traders picking up as we run through the rest of this year. So that gives you a bit of a view across the whole of the trading segment, but looking forward to seeing what they can deliver for us as usual as we end out the year.
Lydia Rainforth, Analyst
I have two questions. First, regarding gearing, how much higher are you willing to go? Currently, we're at about 19.5%, and while that might seem acceptable at $70, it's important to consider the $3 billion quarterly buyback over more than 15 quarters. At some point, you might need to think about slowing it down. Secondly, about the Chemical side, regarding planned maintenance, during CMD '25, there was a significant focus on capital employed, and there was a considerable gap to close for optimal performance. What's the situation there? Is it proving more challenging than anticipated?
Wael Sawan, CEO
Lydia, thank you for those. I'll, again, maybe start with the second question and then hand over to you, Sinead. On Chemicals, I think firstly, of course, the macro continues in what has been an incredibly prolonged trough and one that could potentially run for a lot longer as well. Of course, we're seeing the supply coming out of China, more supply coming out, but other parts of the world as well. So this does mean that we're going to have to live with this reality for quite some time. What have we done to respond? I think firstly, what we've talked about is making sure that we continue to high-grade our portfolio. You've seen us move now this quarter. On April 1, we completed the sale of our Singapore Chemicals and Refining assets. We also look at the opportunities to high-grade and selective closures in Europe. We've also announced that we will be looking in the U.S. at what we can do, but that takes time. That's one bucket we’re looking at on the portfolio side and executing what we have said we were going to do. The second bucket for us is also looking at what we can do in terms of self-help. We've been driving down the cost structure there. We've been looking at how we can optimize even further to unlock value, and that's helped us some. The reality is it's just not enough. We are continuing to see sort of a negative free cash flow there, and so I have instructed the team to take the next level of measures that will potentially bridge that gap and move us closer towards free cash flow neutrality. There are multiple levers we're pulling, but we have to move now to the stage where we have to stop the bleeding, and that is what we're going to be focused on. This will be something that the team is very focused on while we continue to drive the reliability improvements and the like. And at the heart of it all, of course, is making sure the assets keep running. Shell Polymers Monaca, of course, has had a couple of good quarters. The last one was a bit more challenged. We need to ensure that we are running that asset at capacity. So more for us to do and more for us to deliver in the Chemical space, even though the macro continues to be very challenged. Sinead?
Sinead Gorman, CFO
Yes, thanks, Lydia. And with respect to gearing and how high will we go, let me take it a little bit differently and say how I think about it. The thought process is very much around the trade-off between value and risk. It's that trade-off between buying back our shares at a very attractive yield, whatever metric you want to use, versus leaning on the balance sheet and any risk that comes with that. Now of course, when your balance sheet is sitting at a gearing, as you say, of 19.1%, there's a lot of space there, obviously as well. Of course, you're talking about that attractive yield we just discussed. Where we went to net debt, of course, this time, the gearing went up roughly just under 0.5%, which is about $1.7 billion equivalent. So what is it? What was in that? Probably worth unpacking that a little bit because what you saw was, roughly speaking, about $1 billion of inventory build and roughly speaking, about $0.5 billion related to leases. In other words, Mero-4 coming on. So you can see most of that net debt increase was actually about things that add cash and add value later on. So I'm very comfortable with where my balance sheet is, very comfortable where the gearing is as well. So what does that mean for us? It means that I need to focus in on what have we told you. We've told you about that 40% to 50% is related to basically our cash flow. That's a promise, that's sacrosanct to us in terms of that return. So we're focusing on that and make sure we continue with predictability going forward.
Wael Sawan, CEO
Thanks, Sinead. I like that sacrosanct. All right, Lydia, thank you for that question. Luke, let's go to the next one.
Martijn Rats, Analyst
I have two questions as well. First, considering the strong marketing results, could you share your thoughts on the current state of global oil demand? As the year has progressed, many of us have anticipated weaker oil demand due to tariffs and below-trend GDP, with most estimates for oil demand growth being downgraded. However, the results are strong and refining margins remain robust. I'd appreciate your insights on this. Secondly, regarding the ongoing tough market conditions in the Chemicals sector, I've heard from our Chemical team that there’s some optimism surrounding anti-involution in China. Although I wasn't familiar with that term, it seems the Chinese government is taking steps to reduce excess capacity in both the chemicals and refining sectors, which might alleviate some of the surplus. Do you believe this could eventually provide some relief for chemicals earnings?
Wael Sawan, CEO
Thanks for those two, Martijn. Let me pick them up, starting with your second one maybe very quickly. Indeed, I mean we pick up the same. But at the end of the day, what we can control is our own reality. What we find at the moment is there's been a discussion on this for quite a few quarters now. It hasn't materialized. And this is why we needed to escalate our own interventions to the next level of levers that we have. Clearly, if there is a move in that space, it would impact the chemicals market and the chemicals margins just given the scale of production coming out of China at the moment. So we will watch that with interest. But I'm not in a position to speculate, of course, on where it might go. I think on the broader marketing and to your point around global oil demand. So year-to-date, we've seen roughly 1 million barrels per day of oil product demand growth. That's pretty robust, and it's being fueled despite some of the headwinds that we have seen, of course. We'll have to really understand what the impact of the tariffs might be in the second half of the year. Of course, we also have to keep a close eye on where OPEC+ goes as they continue to ease some of the production cuts that were in place. Another big question is how the U.S. responds, of course, to Russia in terms of potential sanctions that have been talked about. That is a lot that I can't control; we can't control as a company. So what we have tried to focus on is what we can control. The investment thesis that we are building, Martijn, is one that aims as much as possible to be non-price dependent. What do I mean by that? And maybe just a moment to unpack it a bit further. We have been in the sort of mode of one thing to transform the company for just over 2 years now. We have made excellent progress. A couple of years ago, we thought we would be at $2 billion to $3 billion by the end of 2025, we're at close to $4 billion in the middle of 2025. That gives you a sense of the culture change happening in the company. We are really looking at how we are more disciplined in our capital allocation. You've seen that in terms of both the quantum and where our capital is going. You've seen us continue to drive operational enhancements in our business. This is what we can control. Sinead has already alluded to the strength of the balance sheet, that is another element that we can make sure we strengthen as we go into choppy waters. But at the heart of it, what we have also promised is a 10% free cash flow per share growth between now and 2030 on a CAGR basis. The attraction of that is just over half of it is coming from buybacks, again, something we can control. The remainder is coming from the transformation of our downstream renewables business, and some of the OpEx cuts that we have alluded to. So a lot of it is non-price dependent. That is what we can control and what we're trying to drive towards. This, in my mind, is the heart of the investment thesis that we are trying to drive, all while we deploy capital to build that run rate for the 2030s and build that cash flow growth that we will expect into the next decade. Thank you for the questions, Martijn.
Josh Stone, Analyst
Two questions, please. First, on the cost savings. You had great success at bringing down costs. If I look at the numbers divisionally, it looks like the Upstream has been a big component of that compared to some other parts of the business, also matching some of your earlier comments on that. When you look at the opportunities from now, where do you see the most room for further improvement? Are you running out of steam in the Upstream at all? Or is that still an area of focus? And then second question on acquisitions. Last time, you told us you want to be value hunters, and you've been connected with a couple of companies this quarter. So I'm interested to see how you think the hunt is going? And any comments around your appetite to do deals today?
Wael Sawan, CEO
Yes. Let me discuss those topics, starting with the cost trajectory. As you mentioned, Josh, we've made good strides. However, as I noted at Capital Markets Day, we began with a top-down target and we've now evolved into a bottom-up reality. We're identifying numerous cost reduction ideas emerging from the shop floor and our assets. Recently, in Malaysia, I discovered that the offshore assets have identified 150 opportunities they are actively pursuing. This shift is what I hoped to see, and it's been pleasantly surprising to witness how quickly it has developed within the organization. Where will future reductions come from? From every area. Upstream has made progress, but it's important to remember that Upstream has also consolidated some of the functional costs. The functions are working to simplify and automate processes where AI can be applied. We are making significant efforts to address the next wave of opportunities in our supply chain. We spend over $40 billion each year, creating vast opportunities if we can standardize our requirements and adopt a more commercial approach. We continue to simplify the organization and are focused on breaking down the complexity we've introduced and rebuilding it from the ground up with a more risk-based perspective on how we operate. I'm still optimistic about these opportunities. I foresee a clear path to the $5 billion to $7 billion in cost reductions we've already indicated we plan to achieve by 2028. Regarding acquisitions, there hasn't been much change since our last discussion. The criteria for acquisition remain stringent. As I've mentioned before, we will make appropriate moves at the right times when we see value. Recently, we've made three such moves. We've increased our equity interest in Ursa, an operational platform in the Gulf of America. We've raised our equity stake in Gato do Mato, a project in Brazil that we operate. Additionally, we've enhanced our interest in Bonga, an asset in deepwater Nigeria that we manage. We've strategically utilized some flexibility within our capital budget to strengthen our positions in areas where we believe we have a competitive edge. We are monitoring market developments and opportunities closely. However, as I noted, the standards we set are high, particularly when weighing them against our buybacks at attractive yields for our shares. Our capital allocation strategy will remain adaptable, centered on creating inherent shareholder value. I’m not fixed on reaching a specific target. Thank you for those questions, Josh. Let's move on to the next one, please, Luke.
Michele Della Vigna, Analyst
Congratulations on the strong results. Two questions, if I may. First, I was just wondering if you could comment a little bit more on the resilience of your current buyback program to temporary lower moves in the oil price. Some of your peers are starting to show that if oil went to $60 or below, probably the quantum would change. How would you feel about that? And then secondly, I wanted to come back to LNG. It was very helpful, the comment that this rate of earnings in the Integrated Gas business is probably the new normal. But I was wondering if you could perhaps expand a bit more into some of the moving parts for the next 1 to 2 years, including the contract expiries, the growth in LNG Canada, the unwinding of some of the hedges taken on during the Russia-Ukraine conflict and also what is probably going to be a more oversupplied LNG market?
Wael Sawan, CEO
Thank you for that, Michele. Do you want to touch on the first one, Sinead?
Sinead Gorman, CFO
No, absolutely. So we can look at it in different ways. From a static point of view, where are we? You know as well as I do that we have a balance sheet which is very strong. We're sitting at below 20% in terms of gearing. Each quarter, we do look at how are we going to take a decision quarter-by-quarter. We also need to look at it from a dynamic perspective as well. The reality is it's not just static; it is dynamic, and it's not just impacted by the macro. We have to look through the quarter in terms of that cash flow volatility for that specific quarter. Beyond that, we have to look to the long-term, medium-term, and long-term fundamentals. So are they going to persist or not? Where do we believe the macro is going to go? That means, of course, that whilst I consciously have been repositioning the balance sheet in terms of its strength, we also have the ability to look at different levers. Those levers are quite broad. We have OpEx levers and CapEx levers, which we've discussed, but there are other factors to consider. All of this allows us to have considerable predictability in terms of results. Remember, at the moment, in terms of that 40% to 50% distribution level, we're 46%. In terms of gearing, we're at 19%. So I'm very comfortable where we are. Do you want me to take the LNG one?
Wael Sawan, CEO
Sure, please go ahead.
Sinead Gorman, CFO
In terms of the LNG side of things as well, we've already gone into it. Our thinking is where LNG is at the moment; it feels much more like the new representative of the norm. Why is that? There are several things at play. We talked about volatility earlier and the fact that the volatility has changed. If you look back to 2019 and then look at just the war, you could see a difference, and we're now back to pre-war in terms of volatility. Beyond that, of course, there are multiple factors that come into play as well. There is the product mix that we have as well, and our product mix changes. We have flat price coming through that has dropped; you also see where our volumes are coming from. Some of those legacy contracts have rolled off, and so have some of the hedges that we have. Our portfolio mix is very key. You'll see that change as we see some of the molecules coming in and the change in those contracts. It's really about that portfolio mix.
Wael Sawan, CEO
Excellent. Thank you very much, Sinead. Michele, thank you for those questions. Luke, let's go to the next one, please.
Biraj Borkhataria, Analyst
The first question is about LNG Canada, specifically regarding some reports about ramp-up issues. Can you clarify if there are any implications for the timing and ramp-up of Train 1 or Train 2? The second question is about the cash flow for this quarter. The CFFO headline numbers were impacted by a one-time cash return from the NAM joint venture. Can you provide insight on what to expect going forward, whether this is an annual occurrence, and if there are any plans for 2026?
Wael Sawan, CEO
Thanks, Biraj. Let me take the first one and then ask Sinead to address the second one. LNG Canada, super proud of the team. I mean this is a massive project. We brought the first part of Train 1 on stream. It's been running steady and stable. We're essentially churning out a cargo at the moment every 8 days. As we progress the ramp-up of Train 1, that moves to 1 every 4 days and so on and so forth as you get into Train 2. The ramp-up profile is very much in line with what we expected. I've read the article; I still scratch my head as to some elements of it. Suffice it to say we are very pleased with the momentum that we're seeing in LNG Canada and the work that the team is doing there. I'm very much looking forward to, as we get over the next month or two, to start to see Train 2 as well ramping up. I'm excited by the opportunities that brings. A couple of points around LNG Canada since we're on it: it's important to recognize the iconic nature of this project. We're talking about significantly shorter transit routes to get us to Asia. This is predominantly uncontracted volumes for us that allow us to trade around that. As Sinead pointed out earlier about earnings this quarter providing a new normal, it's important to have some of that optionality so that when volatility comes into the market, we can use some of these cargoes to trade around. LNG Canada is a critical part of our overall portfolio going forward, and it does, of course, create a bit of an offset for some of those advantageous contracts which have rolled off, as you're fully aware of.
Sinead Gorman, CFO
Absolutely. And Biraj, you're correct in terms of the non-dividend. Just to remind you that what in effect has occurred is a 0 impact on cash. In terms of free cash flow or net debt, 0 impact. But you're right, it did flow through to different parts: CFFO and CFFO ex working capital. It was a working capital move as well. Just to make sure there's no flattery on our free cash flow nor on our bottom line in terms of the net debt. Ultimately, what will occur in the next year or so will be up to NAM as a joint venture to decide on dividends each year. So whether they go ahead with that, I can't comment.
Wael Sawan, CEO
Thank you, Sinead. Biraj, thank you for that. Luke, can we go to the next question, please?
Doug Leggate, Analyst
Wael, I wonder if I could ask you about the commentary around LNG. I think if I heard Sinead correctly, she said this is the new normal. But in your preview, you said trading and optimization will be significantly lower than Q1 '25. Obviously, there's a lot of questions over what the spot market could look like over the next 5 years. What level of confidence do you have that LNG trading can come back to, I guess, what you would call normalized levels? That's my first question. My follow-up is on cash flow very quickly, and that is, Sinead, you talk often about cash flow from operations, but you've got $2-plus billion below the operating line on interest and lease costs. Where does that factor into your comfort with the buyback program?
Wael Sawan, CEO
Thank you for that, Doug. I'll start with the first question and then pass it to Sinead for the second. Regarding the LNG market, prices are currently stabilizing around $10 to $12 per million Btu, similar to what we observed before 2022. The volatility is also within this range for various reasons. Currently, we're seeing strength in Europe and some weakness in China, particularly in industrial demand. The dynamics of global trading are shifting. LNG continues to be an attractive and versatile energy source, and we believe it has significant growth potential, with a projected increase of 60% by 2040. Now, as we discuss what a normalized quarter looks like, we're aligning more closely with pre-2022 conditions, indicating that this level of volatility and pricing reflects a new normal. This quarter's trading is representative of that. The first quarter had notable arbitrage opportunities, and we hope to see more in the future. Ultimately, we'll plan according to current conditions and seize any opportunities that arise. As these opportunities come up, we'll aim to capitalize on them. For our baseline planning, we feel this is more indicative, allowing us to strengthen our portfolio in the upcoming quarters. More supply is entering our portfolio through LNG Canada, Pavilion, and other projects. It’s important to note that we've also lost some advantageous supply contracts in the past, which we aim to offset and improve over time.
Sinead Gorman, CFO
And on the second one, Doug, absolutely. Of course, I consider all cash movements into free cash flow as well. Whether that is just a CFFO bit, but of course, the CapEx impact that comes off that as well. Anything that flows through from interest point of view or from leases. All of that gets considered whenever we discuss what we are going to do in terms of value versus risk decisions each and every quarter. Those lease payments that you referred to in there as well. I mentioned this one earlier; Mero-4 being one, but of course, there are more leases that come into our portfolio, that's like the one that I mentioned earlier. So that is very much just a consideration that comes through. But of course, it's all about value. And of course, those lease payments are ones that actually generate future cash as well. So we utilize those underlying assets. Yes, that part of the consideration doesn't change where I stand in terms of 40% to 50% being sacrosanct in terms of distribution and being very comfortable with where my balance sheet is now.
Wael Sawan, CEO
Thank you for that, Sinead. Luke, let's go to the next question, please.
Alastair Syme, Analyst
Monaca, how far away are you from being profitable on this asset? You alluded to potentially looking at JV structures and a strategy. Why does bringing in a partner help improve the performance of the business? My second question is on biofuels. A year ago, you hit the pause button on the Rotterdam project. I'm wondering if a year on, you've got any reflections on what you want to do with that project and indeed, probably your biofuel strategy as a whole, given that politicians still seem intent on raising mandates?
Wael Sawan, CEO
Thanks for those two questions, Alastair. Let me touch on those. On Monaca, what we have said is we will look at strategic and partnering opportunities for the whole of the U.S. What we have reflected on is we have a terrific asset there, advantaged in many ways. It's uniquely located in a part of the world where we can reach a significant portion of the customers that need that product. We have fiscal advantages from the state. We have access to an attractively priced resource as well. The issue is it's our only one, our only major facility. That's why we said we're not the natural owner of that asset. Ideally, you want to leverage that with two or three other plants and create optimization opportunities, for example, with our LNG facilities around the world, where we can meet our customer demands through different channels and take advantage when one plant is shut down to supply from the other one. Not to mention the obvious synergies on costs and the like. We're looking at how we can unlock more value, having reached the conclusion that we're not the natural operator and owner of that asset. What I would say is the conditions in the market mean that it's not easy to be able to transact on something like that immediately, but we continue to have discussions and will update you as appropriate. There's little to say about our Rotterdam facility at this stage. We continue to review the options. Of course, we are looking at the backdrop of the market. We see it as a market that is challenging because of excess supply coming from the U.S., from Asia, but also there's been some backtracking on mandates here in Europe. To your implied question, it is a weaker market. This is one of the first levers you'd look at for decarbonization, and the trading desk that continues to source bio products and sell into our own shorts does very well in this market. We're being selective around where we deploy capital to ensure we're able to unlock value in a value chain where we believe we are advantaged. Let me pause on that one and go back to Luke, please. Thanks, Alastair.
Yim Chuen Cheng, Analyst
Wael and Sinead, just curious that you haven't talked much about exploration. In order for you to sustain nickel production or maybe even grow it, this is a depleting asset base. Do you think you have the right size of the exploration program? Or do you think that you need to step it up? And if you do want to step it up, where is the focus going to be? How big of an increase may need to be in order for you to perhaps be able to use it to replace more of your resources? Second question is on trading. In the U.S., we do have a President, who loves to trade day and night on many matters, and unfortunately, that often impacts market conditions. From that standpoint, that’s not really tradable. When you guys manage your trading business, how do you take that into consideration? If that means you will take maybe a risk down compared to previously, and correspondingly your future trading results, everything else being equal will be lower than they were in the past? Or do you think you'll be able to handle and manage that doesn't impact your future results and you don't have to change how you manage your trading operation?
Wael Sawan, CEO
Thank you, Paul. Let me start with the first question and then ask Sinead to address the second one. Exploration, I think our exploration program is right-sized at the moment. We went through a significant reset, I would say, of our exploration department, capability, the funnel because the hard truth is while we have had some good progress in certain areas, it hasn't delivered what we wanted. We have rightsized the spend. We have refocused. We have challenged ourselves to raise the bar on how we can deliver better results for every dollar we're spending in exploration. The areas where we continue to invest are in basins where we have established track records like the Gulf of America, Malaysia, and Oman where we have significant assets and more. We also look at opportunities selectively. Of course, you know we have Namibia; we are looking at what others are doing, continuing to learn and positioning ourselves if something interesting comes up. Our exploration portfolio is one now that is grounded in a better place. We have some exciting wells coming in the next 6 to 12 months, which I’m looking forward to seeing what will come out of that. Always recognizing, of course, that exploration plays for the long game. The levels that we are investing in, I think, are the right ones, and I'm confident in this reset that the team has now put into place. I'm confident in the quality of leadership that we have and excited by the opportunities that are coming through. Sinead?
Sinead Gorman, CFO
Thank you, Paul. You're really asking about the impact on trading with geopolitical uncertainty and how we handle that, et cetera. This is where having a very high-quality trading team matters, and we do. Our capability, I believe, is second to none. That team has the ability to focus on what matters, and they will make the calls quarter-to-quarter. They have an excellent set of assets to optimize around. It's about making sure we have those assets up and running and providing the molecules that we can then optimize and put into the right place to take advantage. On the other side, they make judgments based on whether they trade around fundamentals or other factors coming through. They will make a different call quarter-to-quarter. We've seen Capital Markets Day guidance at the 2% to 4% ROACE uplift in the medium term being held and no earnings losses in any quarter, that hasn't changed. I talked earlier, in terms of crude; they made a call to be more prudent this quarter and focused on trading around fundamentals rather than understanding the volatility that seemed to be based on fundamentals. That's the judgment they took, and we support them. Looking forward to seeing what they deliver for us in the next quarters with full support.
Wael Sawan, CEO
Thank you, Sinead. Thank you, Paul, for those questions. Luke, let's go to the next question, please.
Lucas Herrmann, Analyst
I have a couple of straightforward questions, though one might be a bit abstract. Sinead, can you update us on the divestments this year? Specifically, where do you think you'll end up in terms of total divestments for the full year? Also, where do we stand regarding Colonial and any expectations you have at this time? As for a more unusual question, Wael, could you provide insight on Zabazaba or OPL 245? I'm mentioning it because several projects that have been in the portfolio for a long time are starting to make progress, and I wonder if that should be on our radar as well.
Wael Sawan, CEO
Thank you, Lucas. Let me start with the second one, and then Sinead, if you want to address the divestments. Of course, we're looking deep into our funnel of opportunities. It helps there, Lucas, that we have focused our portfolio, particularly in a place like Nigeria. I think for everyone's benefit, the licenses and blocks you refer to are deepwater Nigeria blocks. We're looking at opportunities within the deepwater space to continue to expand. You know we FID-ed Bonga North. There is potential for the next phase in Bonga, what we call Bonga Southwest, which would require its own FPSO. That's still work in progress. There are other tieback opportunities but also greenfield opportunities, like others which are in the area. OPL 245, of course, is one that Eni operates, and we will defer to them to come up with a plan for that opportunity to see whether it's investable. To your broader question, we are, particularly as we see our well costs continue to be attractive vis-a-vis our competitors. We continue to look at how we have simplified the funnel of project opportunities on the back of something like a Vito, Whale, or Sparta, learning more and more about how to create more value with less resource. We are looking to apply that in different fields, including deepwater in Nigeria.
Sinead Gorman, CFO
And on divestments, Lucas. The thinking on divestments for this year was that, not that it was going to be a core part or needed part of the underlying financial framework. You can see that with the perspective of where we are on gearing. For us, it's more about capital reallocation across the portfolio and cleaning up different aspects of it in line with our strategy. That's what we've been focused on doing. You've seen that on a couple of things. You saw it in our renewables portfolio in particular. We just announced a JV in Savion. You'll see some proceeds come through on that later on. We also announced the divestment of Inspire, a B2C entity in the U.S. that needs to come through as well. These are not massive amounts of money in the greater scheme of things, but it's more about aligning with our strategy. Of course, Bochum is already done, as you know. Beyond that, there are mobility and portfolio upgrades we're doing, which is Mexico, Indonesia, and of course, South Africa that still has to come through. Again, it's less about the proceeds. It's more about taking things that don't fit our strategy off the books to redeploy OpEx and CapEx elsewhere. Colonial is the one that's still to come. That will hopefully close out in Q3 or Q4. We will see that come through before the end of the year and see those proceeds as well.
Wael Sawan, CEO
Thank you, Sinead. Thank you for the questions, Lucas. Let's go to the next question, please.
Irene Himona, Analyst
I had two questions, both on marketing. First of all, lubricants, I can see first-half earnings are up substantially on flat volumes. Your unit EBITDA is up materially. I wonder if you can talk about what's driving that? And is it sustainable? And then in mobility, again, your unit EBITDA margin is the highest in a very long time. I think you referred in your remarks to better premium product margins, but mobility includes other things like convenience and e-mobility, et cetera. You no longer disclose those margins by segment on a quarterly basis. Can you talk around the different moving parts, please? Whether you anticipate the margin improvement to be sustainable?
Wael Sawan, CEO
Do you want to take it?
Sinead Gorman, CFO
Happy to. In terms of lubricants, well, actually, our marketing segment did really well this quarter. It’s pleasing to see just the change that's coming through. Specifically on lubricants, you're correct, the margins are doing well—that's due to the premium products growth. The teams are pushing that and making sure we focus on where we can differentiate. We’ve also had stable base oil pricing, which has helped a lot. OpEx is very much under control, and they are line by line, making sure that they reduce OpEx there, focusing on where it actually adds value. In terms of mobility, which you asked about: again, it is the premium brands coming through. We did take away the breakdown because we weren't seeing that as particularly useful. Premium fuels are up over 1% quarter-on-quarter. We're seeing Europe and the Americas doing very well. The convenience retail is beginning to differentiate, but that depends on where you are; it's different across different areas. The most key about that and what teams are doing in mobility is they're not trying to play the same aspects in each area; they're looking at how they can make the most money and extract the most value, country by country, and that's what you're seeing come through.
Wael Sawan, CEO
And I’d maybe just add, I think there’s more to go. I’m excited by what the marketing team has been doing. Two or three years ago when we came together in CMD '23, we laid out a vision for that business. We reset expectations, and they have followed through on it and have pushed even beyond that. I think there’s more to do. This is a great example of how we’re going about trying to turn around some of our underperforming businesses. We were clear in Capital Markets Day '25, $45 billion of our capital employed is returning nothing at the moment or close to nothing. This is the opportunity for us. If we can truly unlock the full potential of those businesses and if not, how we recycle capital, we allocate that capital to the higher-returning businesses, therein lies an exciting opportunity that we have. Irene, thank you very much for those questions. Luke, let’s go to the next question, please.
Christopher Kuplent, Analyst
One quickly to mop up on the quarter, again, marketing. It's also outperforming on much less CapEx than you told us about as their budget at the CMD in March. I wondered whether you can give us a steer on that, considering the very light run rate for the first half. Then one for you, Sinead, and I can see your eye rolls already—the question around buyback, balance sheet, payout. I think you've given us many ways to show you're comfortable. But let me ask you a mean question. You've had, for a number of years, a 30% to 40% payout ratio and paid out above that. Can we assume that if you stood above 50%, you'd still answer in the same way, pointing to balance sheet strength in that hypothetical scenario, of course?
Sinead Gorman, CFO
Would you like me to take both?
Wael Sawan, CEO
Yes, why not take both.
Sinead Gorman, CFO
I would never eye roll, Christopher, of course. Let me take them both. In terms of mobility CapEx, you're right, it's light on CapEx at the moment into the middle of the year. We've asked the team to focus on extracting the maximum return they can. They’ve had a lot of CapEx in the past, and they now need to show that they can return against this. They also need to put the right opportunities to us for better returns, and then we're willing to release more. But 80% of cash CapEx is into 10 key markets for mobility, so that focus is working, and you're seeing that. Your second part, which was around the buyback and the comfort level is correct. We’ve moved from 20% to 30% to 30% to 40% to 40% to 50%. I maintain that 40% to 50% is sacrosanct. Where are we standing at the moment? We're sitting at 46%, as you know, on a rolling 4-quarter basis. You're asking specifically the question of, will we move above 50%? That's really what's underlying there. To do that, we need to believe it’s the best capital allocation decision for the quarter or for the company, more importantly in that specific quarter. We’ve had that conversation a little bit; I’ve alluded to it earlier as well. That is a competition we have, attributing between Wael and myself at the Board level, just thinking through, quarter-to-quarter, what is the value versus risk decision we need to make. Of course, we look at the company performance; we look at the macro. I've said before, the short term isn’t just the point; it has to be based on our belief as to whether the macro will continue to persist in the medium and long term, and we'll see what goes about that. So no eye roll, I promise. I believe in the strength of the balance sheet, I lean on it, and we’ll make the decision that is appropriate for the company on a value lens.
Wael Sawan, CEO
Let me maybe help you, Sinead, because I think you've been asked the question every which way. What I would say is the following: The 40% to 50% that Sinead has described as sacrosanct is one that we have been very clear on. We’re committed to it through the cycle. We are generating our free cash flow through all the improvements we’ve talked about, and we’ve said clearly that we will continue to preferentially allocate towards buybacks because we believe that is the best capital allocation decision for us at this point in time. We’re absolutely committed to it. You’ve seen us continue to deliver on that. I would also say we still have a lot more to unlock from this company. There’s a lot more to come, whether it is from the OpEx opportunities we see, moving faster than planned. We still, as I mentioned, have unproductive capital to do better on. We still have businesses that we are looking to take to the next level of outstanding performance. I think Sinead touched earlier on some potential strategic divestments we have coming through that will bring in proceeds. We are in a position where we have the capital to stand there and make choices. Every time we take one of those choices, we look at what is the best use of that capital to unlock intrinsic shareholder value. Again, not being dogmatic but looking at, at that point in time, what is it? At some point we will be looking at more buybacks; at other points, we are looking at acquisitions, as we've done with the last 3 that I've mentioned. Those are all the right steps at that point in time, but we don't want to give a blanket answer other than to say, please trust us to allocate in the best way that we think is there for our shareholders. Let’s go to the next question, please, Luke.
Ryan Todd, Analyst
Maybe one on—in the Gulf of Mexico or at least at Whale, the project, it looks like the ramp if that project went very well. Can you talk about this in the context of improving operational performance overall, but also maybe specifically in the basin, the Gulf of Mexico, which seems to continue exceeding expectations? How does that improvement, and maybe even the change in administration, play into how you think about opportunities for sustaining volumes or growth going forward? Maybe on refining, distillate markets are really tight, which has been sustaining margins. Can you maybe talk about how you think about refining market dynamics looking into 2026 and whether your portfolio is now where you want it to be there?
Wael Sawan, CEO
Ryan, thank you for those questions. Let me address them. Very pleased with Whale ramp-up. You’ll recall we started with this template on Vito. We then carried it across to Whale and are in the process of carrying it across to Sparta as well. It has achieved nameplate capacity within 5 months of first oil delivery, which is outstanding. The wells have delivered what we hoped. The performance all the way through the project, whether it was drilling the wells, construction was all very much as per plan. I think to your point around the underlying operational performance, why is Whale different than the old model of projects we had? We have looked to simplify the setup to focus on rigor in maintaining our equipment, not allowing for redundancies and ensuring we focus on delivering with the equipment we have. Link to your point, this is symptomatic of the improvements we have seen across the Gulf of America, across our asset base. We're seeing it in well reservoir and facilities management to produce more from our existing wells and infrastructure. We're seeing it in the stability of our planning sequence when it comes to turnarounds and the like. We're seeing it in the cost structure. We're seeing it in the availability and reliability stats. This is becoming structural and intrinsic in how we drive the business. Regarding your question about the change of the administration: clearly, with the Big Beautiful Bill, there's a steadier lease sale schedule planned for the next 15 years, which is critical for keeping these facilities full. That gives me a lot more comfort that we can continue to tie back to many of our facilities. With new hubs like Whale and Sparta and some terrific ZIP codes, we can bring many of the key hubs that allow us to continue bringing in new volumes. A great story and a great example of how performance, discipline, and simplification are coming to life. Sinead? Sorry, I want to go to the refining, apologies. On refining, 2026: the current reality is that market went through a challenging period for the first half of the year. You'll see July numbers and the strength in margins moving to double digits at the moment, specifically for diesel in short supply. Inventories are relatively low, indicating a more robust market for all products for the second half of the year. It will depend largely on where geopolitics takes us. It depends on where the tariffs impact goes. Where we sit, I think the portfolio we have is what we believe allows us to optimize well. We have critical hubs in the Netherlands, Germany, Canada, and the U.S. Those are the ones we’re optimizing around. Our traders don’t just depend on the refineries; they depend on the flow of third-party products, our shipping logistics, storage, and blending capabilities. It’s all these arteries that create value out of that market, and I believe we are well-positioned to continue to do that. Thank you for the questions. Luke, let’s go to the next question, please.
Peter Low, Analyst
The first was just on CMP. This was the first quarter without Singapore. I think in the past, you suggested that was a heavily loss-making asset. We didn't quite see the step-up we might have expected in that division, given that dropped out. Was that simply a result of the issues of Monaca, or is there any reason to think that the benefit of that disposal might just take a little bit longer to come through? And then just say quickly on working capital. You had a build in the first half. In recent years, it looks like you typically have a bit of a seasonal release in the second half, particularly in Q4. Are you expecting something similar this year?
Sinead Gorman, CFO
I'll be very short on this one if you don't mind, Peter. In terms of the first one, CMP and Singapore, we only completed it in the first month of this quarter. That has to play out. The settlement amounts that always happen in any transaction, those flowed through in Q2 as well. So you'll see some of that play out, particularly on OpEx and some of the losses we would have had later in the year. Regarding working capital, we did have a small build as you mentioned, it depends quarter-to-quarter, it will depend on the opportunities. For us, working capital is about opportunities. It’s the same as any dollar, whether it’s deploying for OpEx, CapEx, or distributions. We think very carefully about where to use it. We will make choices based on inventory and market conditions. So a difficult one to predict, but we will see how that plays out.
Wael Sawan, CEO
Thank you, Sinead, and thank you, Peter. Thank you all for your questions and for joining the call. In conclusion, we delivered a robust set of results in a challenging geopolitical and macroeconomic environment. We continue to remain focused on executing our strategy, transforming the portfolio we have, and delivering on our key targets. We're confident that our strategy is the right one to deliver more value with less emissions. Wishing all of you a very pleasant end of the week and hopefully, a well-deserved rest for many. Thank you very much.