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EARNINGS PREVIEW: Shell 2Q Pft Seen Up 25% At $4.17 Bln

The Wall Street Journal: EARNINGS PREVIEW: Shell 2Q Pft Seen Up 25% At $4.17 Bln

“we see no quick (organic) fix for Shell’s ailing growth platform”

DOW JONES NEWSWIRES

By Mark Long

Posted 28 July 04

LONDON — Royal Dutch/Shell Group (RD, SC) is expected to report Thursday a 25% year-on-year rise in second-quarter profit, thanks to high oil and natural gas prices, though any significant update on corporate governance issues would likely overshadow the numbers’ impact.

The Anglo-Dutch oil giant is expected to say its second- quarter profit rose to $4.17 billion from $3.115 billion a year ago, according to an average of eight analysts’ forecasts compiled by Dow Jones Newswires.

This profit figure is reported on an adjusted current-cost-of-supplies basis, which strips out the changing values of hydrocarbon inventories and special items.

Shell has already flagged a $330 million hit it expects to take in its second-quarter profit after tax, stemming from unsuccessful exploration of assets it inherited in its 2002 purchase of the U.K.’s Enterprise Oil.

“After the disappointment of the reserve downgrade, it will be pleasing to see the group report a solid set of numbers,” Chevreax analyst Peter Hitchens said in a research note, referring to the scandal surrounding the massive overstatement of proven oil and gas reserves.

Like its rivals BP PLC (BP) and ExxonMobil (XOM) of the U.S., Shell ‘s upstream profits will surge thanks to high oil prices, which were boosted by nervousness over continuing turmoil in the Middle East, heavy speculative buying and bullish sentiment fueled partly by rising fuel-products prices in the U.S.

In a trading statement early in July, BP said the average price of benchmark Brent crude rose to $35.32 a barrel, up 36% from a year ago.

The higher prices will salvage a quarter in which Shell’s production is expected to have declined by as much as 6%, analysts said.

Asset sales accounting for 100,000 barrels a day of output, the shutdowns of the large Mars field in the Gulf of Mexico and others, plus the impact of production-sharing contracts will have all pressured production lower.

Production-sharing contracts with some foreign governments stipulate that output volumes claimed by the foreign partner must fall if prices rise, which can hit oil companies’ overall production. This hits Shell most in Nigeria, where output quotas set by the Organization of Petroleum Exporting Countries also cap output growth.

Any word on how Shell will turn around its ailing exploration and production business to support future growth would be well-received, though the market will likely have to sit tight until the company’s more comprehensive strategy overview, scheduled for late September.

Strong year-on-year profit growth is also expected from Shell ‘s refining and marketing, or downstream, business, thanks to surging refining margins around the world. Weakening retail margins, particularly in Europe, will bite somewhat into downstream profits, however.

Some analysts added they are keen to hear updates on the progress of Shell’s ongoing efforts to cut costs and boost profits from its refining and retail operations in the U.S.

Regardless, the focus of the day will be on any comments or updates about the company’s review of its corporate structure, launched in the wake of this year’s succession of downgrades in its proven oil and gas reserves.

The company – 60%-held by Royal Dutch Petroleum of the Netherlands and 40%-held by Shell Transport & Trading of the U.K. – has said it is considering all options to improve corporate governance, including possibly undoing its century-old structure and unifying its twin boards under a single chief executive.

“We are becoming increasingly optimistic that management is at least committed to making some of the hard decisions that will be required to turn the group around, leaving some cause for optimism for the long-term,” Merrill Lynch said.

“Unfortunately that still leaves the near term – and we see no quick (organic) fix for Shell’s ailing growth platform,” the investment bank added.

Company Web site: http://www.shell.com

-By Mark Long, Dow Jones Newswires; +44 (0)20 7842 9356; [email protected]

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