Royal Dutch Shell Plc  .com Rotating Header Image Shell 1Q Net Falls 16%, Announces $2B Buyback Shell 1Q Net Falls 16%, Announces $2B Buyback


Thursday April 29 04

LONDON (Dow Jones)–Royal Dutch/Shell Group (RD, SC) Thursday said its first-quarter net profit dropped 16% from a year earlier’s record result that was skewed higher by more than $1 billion in special credits.

The beleaguered Anglo-Dutch oil giant also moved to win back wary investors with a plan to buy back $2 billion worth of its own shares this year, and said it would boost spending on exploration for oil and gas.

Shell, reeling since January from a series of stunning revelations about the false reporting of its oil and natural gas reserves, reported first-quarter net profit of $4.43 billion, down from $5.31 billion a year ago.

The year-ago result was buoyed by a special credit of more than $1 billion, mostly gained from Shell’s sale of its holding in German gas company Ruhrgas (RUH.YY).

On an adjusted current-cost-of-supply basis – which strips out the changing values of hydrocarbon inventories and special items and is the market’s preferred earnings yardstick – profit rose 9.3% to $4.25 billion from $3.89 billion. Revenue rose 10% to $76.23 billion from $69.37 billion.

By this measure, results came in at the high end of a broad range of analysts’ forecasts, and soundly beat an average forecast for $3.6 billion from 34 analysts compiled by the company.

Shell’s revenue rose 10% to $76.23 billion from $69.37 billion.

Shares in the 40%-holding, U.K. parent company Shell Transport & Trading (SC) initially jumped more than 3% on the news. At 1100 GMT, the company’s stock was trading 2.9% higher at 398.25 pence.

Royal Dutch Petroleum (RD) of the Netherlands holds the other 60% of the group, and its shares were up 2.4% at EUR41.29.

Analysts and traders said the better-than-expected results and the surprise rekindling of a share-buyback plan come as a relief after a seemingly unending stream of bad news over the past four months.

In particular, the buyback plan “sends a very positive signal to the market,” said Investec analyst Bruce Evers, who recommends holding Shell’s shares.

However, Teather & Greenwood analyst Zac Phillips noted the 60%/40% ownership structure of the group limits the benefits to U.K. shareholders from the $2 billion buyback plan, which looks paltry compared to rival BP (BP.LN). BP has already bought back $1.3 billion in shares this year.

“They’re trying to throw a bone to the market, (but) they’re not really doing shareholders any kind of favor here,” said Phillips, who recommends holding Shell’s shares and has a 425 pence a share price target.

Shell stopped buying back shares at the end of 2002 and has since said buybacks were its last priority for its cash after dividend payouts, investment in the business and using its strong cash position to shore up its precious triple-A credit rating.

But following the downgrade of Shell’s credit rating by Standard & Poor’s and other agencies in the wake of its reserves overstatements, and with no sign of a major slump in continuing high world oil prices, Shell relaunched its buyback program.

Shell also soothed unsettled investors by saying its review of its global oil and natural gas reserves is complete, with no additional write-downs of the proven reserves.

A series of downgrades of its proven reserves amounting to 22% of its total reserves, and years of overstatements preceding them, fueled the ouster of Shell’s top two executives and the reassignment of two others in the past two months.

It has also sparked investigations from U.S., U.K. and Dutch regulators, prompted calls from investors for Shell to streamline its unwieldy corporate structure and inspired a raft of would-be class action lawsuits from shareholders and employees in the U.S.

Shell’s acting chief financial officer, Tim Morrison, said the company hasn’t taken any provisions against possible legal damages in the U.S., but admitted “clearly we have the potential for exposure there.”

Shell’s first-quarter oil and gas production declined 3% to 4.1 million boe/d, mostly because of the sale of producing assets in Thailand and the U.K. Not counting asset sales, production was down by 1%, year-on-year, Shell said.

The lower production from disposals offset income gains from an average 3% rise year-on-year in world oil prices. As a result, income from the oil company’s main money earner, Exploration & Production, fell 9% to $2.75 billion.

Answering critics that it has been spending too little on its business, Shell said it will boost its 2004 capital investment budget to between $14.5 billion-$15 billion from a planned $13 billion. This would help make up for cost overruns on major projects off Russia’s Sakhalin Island and Nigeria, as well as boost exploration initiatives.

Malcolm Brinded, the head of Shell’s E&P business, said the company would boost exploration spending this year to around $1.4 billion from $1.2 billion.

He said extra work planned in the deep waters off the Nigerian and Brazilian coasts, as well as in Libya, where Shell in March signed a preliminary agreement to help develop the country’s substantial oil and gas reserves.

Shell’s refining and marketing business reaped the benefits of higher marketing profit around the world, though lower refining margins in Europe put a cap on gains.

Shell has failed to replace the oil and gas it has produced with newly found or expanded reserves for the past three years, but Brinded said he expects Shell will replace, on average, 100% of its production over the next five years.

First quarter profit in the Oil Products division rose 10% to $1.3 billion.

Shell is the world’s third largest publicly traded oil company, by market capitalization, after ExxonMobil (XOM) of the U.S. and Britain’s BP PLC (BP.LN). ExxonMobil is scheduled to release its first-quarter earnings later Thursday.

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