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Moody’s Confirms Aa1 Ratings Of Royal Dutch Shell Entities

The Wall Street Journal: Moody’s Confirms Aa1 Ratings Of Royal Dutch Shell Entities

“the negative outlook reflects uncertainties”: “Another factor implicit in the negative outlook”


Posted 31 July 04

The following is a press release from Moody’s Investors Service:

New York, July 30, 2004 — Moody’s Investors Service confirmed the Aa1 long-term debt ratings of the guaranteed subsidiaries of the Royal Dutch/Shell Group of companies with a negative outlook. Ratings confirmed included the Aa1 long-term securities of Shell Finance (Netherlands) B.V. and Shell Finance (U.K) PLC. The Prime-1 guaranteed commercial paper ratings of both entities were not under review and are affirmed. At the same time, Moody’s confirmed the Aa2 Issuer Rating and certain IRBs of Shell Oil Company and the A1 preferred stock of Shell Frontier Oil & Gas, both with a stable outlook. The Issuer Rating of Coral Energy Holding, L.P. was downgraded to A2 from A1, also with a stable outlook maintained.

The confirmation of the Aa1 ratings for the guaranteed subsidiaries of the Royal Dutch Shell Group (Shell) reflects the remedial actions already taken and management’s resolve and ability to address flaws in corporate governance, management accountability, and reserve booking practices, as well as upstream competitive positioning, that were revealed when Shell de-booked some 4.4 billion BOE of reserves and restated its financial statements during the first half of 2004. These remedial actions include the replacement of key senior management positions, an extensive overhaul of petroleum reserve audit practices, and establishment of a Steering Committee that is mandated to study and recommend changes in governance and the dual board and legal structures of the Shell Group.

Moody’s believes Shell has both the commitment and the managerial resources to address these issues. However, the negative outlook reflects uncertainties over timing as well as the scope and direction of governance and legal structural changes to be recommended by the Steering Committee. Management has set an aggressive calendar for announcing the committee’s proposals, but execution risk remains a concern for an organization with over a century of commercial, managerial and cultural traditions tied to Shell’s existing dual structure.

Another factor implicit in the negative outlook is that Shell ‘s competitive positioning in global exploration and production, while formidable, has suffered relative to its highest rated industry peers with regard to asset life, petroleum reserve replacement and production growth.

The rating confirmation reflects Moody’s expectation that the Steering Committee recommendations directionally will be an improvement for Shell . Moody’s plans to evaluate the proposals in line with corporate governance best practices, and believes the rating outlook could stabilize as the committee initiatives unfold in the next year.

Concerning the upstream, re-positioning the operations and restoring top tier metrics will necessarily take time. Shell has presented expectations of a relatively flat production profile in the near-term, with prospects for growth in 2006 and beyond as development spending on a number of major projects takes place. Over the next year or two Moody’s will re-evaluate Shell’s upstream positioning relative to its highest rated peers. Shell’s ability to demonstrate progress and greater certainty in these areas would also help stabilize the Aa1 rating outlook.

Moody’s confirmation of Shell Oil Company’s Aa2 Issuer rating and the A1 rating of the preferred stock of its subsidiary, Shell Frontier Oil and Gas, both with stable outlooks, reflects their ownership, strategic importance to, and integration with Shell ‘s global operations, but also the repayment of virtually all of Shell Oil’s third party debt over the last few years as it has been re-financed via inter-company funding.

Coral Energy Holding’s A2 Issuer Rating and stable outlook likewise reflect Coral’s continuing strategic importance to Shell ‘s global and North American natural gas strategies, and Shell ‘s demonstrated support of the venture in the form of capital, sizable liquidity facilities, and Shell Oil Company’s guarantee of Coral Energy’s long-term tolling obligations. The downgrade of the Issuer Rating to A2 reflects notching from Shell Oil’s Aa2 rating and the marginally weaker nature of Shell Group and Shell Oil supports in the wake of their prior downgrades. It also incorporates Moody’s view that Coral Energy benefits from considerable ratings uplift above its fundamental credit quality, given the liquidity risks and earnings and cash flow volatility that characterize wholesale energy trading.

The Royal Dutch/Shell Group comprises on of the world’s largest integrated petroleum companies through the combined holdings of Royal Dutch Petroleum and Shell Transport and Trading, headquartered in the Hague and in London, England.

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