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The Times: Revival in the pipeline?

The Times: Revival in the pipeline?

 April 29, 2004

By Richard Irving, Business News Editor

Shell has shocked investors again, this time by revealing profits far better than they had hoped for.

For most of 2004, Shell has found buyers for its shares as elusive as its “proven” oil reserves.

It was not so long ago, in June last year, that the stock was trading near parity with BP shares at a little over 400p.

Yesterday Shell shares closed at 386.75p, more than 20 per cent below the price of BP stock.

This morning, however, the trend reversed, with BP on the wane while Shell showed gains of more than 3 per cent.  It was Shell, for once, which stole the investor plaudits.

Shareholders may have been kept waiting for the company’s 2003 annual report and final dividend, but results for the first quarter of 2004 came out spot on time and above analysts’ forecasts.

On a current cost of supply basis, which strips out the fluctuating value of oil and gas inventories, underlying earnings rose by 9 per cent to $4.3 billion. The City, Shell shocked by three downward revisions to the company’s level of oil reserves in three months, had forecast a figure of nearer $3.6 billion.

Furthermore, the company announced that it was itself on the hunt for Shell stock, unveiling a $2 billion share buy-back after shareholder pressure and a BP stock repurchasing programme which has won analysts’ praise.

Jeroen van der Weer, the company’s chairman, said: “Despite the extraordinary challenges of this quarter, our staff have concentrated on running the business, working hard to deliver operational results and developing the portfolio of assets and opportunities.”

Shell even kept ahead of BP in the production league, extracting an average of 4.096 million barrels of oil a day compared with its rival’s mean output of 4.015 million barrels of oil a day.

This does not mean, however, that Shell has put its dark days behind it. The company will for years pay for its reserve downgrades in terms of legal costs run up fighting disgruntled US investors.

Shell will suffer the distraction of handling investigations from watchdogs including the Securities and Exchange Commission in the US and the UK’s Financial Services Authority.

The company also said this morning that it was raising its 2004 capital spending budget up to $2 billion, or 15 per cent, to account for cost overruns at Nigerian and Russian exploration projects. Unlike most of its rivals, Shell, which replaced in reserves last year only 60 per cent of the oil it extracted, lacks the comfort of being able to ignore projects which run overbudget.

Every drop counts when an oil company has in reserves only enough crude to last 10 years.

Still, Shell’s improved search efforts may allow it to recover from its current troubles blessed by a double windfall. The strengthened exploration budget should bring it new fields. Meanwhile, it seems likely that most of the reserves downgraded from “proven” this year will, at some point, be reassessed as commercially viable.

On Tuesday, in analysing BP’s share buyback spree, Times Online noted a series of quotations by John D Rockefeller, the father of the modern oil industry.

Here is another one: “The way to make money is to buy when blood is running in the streets.”

Investors who bought Shell shares in early February, when gloom over the company’s prospects was at its deepest, would this morning be sitting on a 15 per cent gain.

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