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Shell Chairman May Accelerate Asset Sales, Buyback

Bloomberg: Shell Chairman May Accelerate Asset Sales, Buyback (Update1)

“Royal Dutch/Shell Group Chairman Jeroen van der Veer, saddled with lawsuits and government probes related to Shell’s oil and gas reserves…”: Probes by the U.S. Justice Department, the Dutch securities regulator and the Euronext stock exchange are continuing.”

Posted 22 Sept 04

Sept. 21 (Bloomberg) — Royal Dutch/Shell Group Chairman Jeroen van der Veer, saddled with lawsuits and government probes related to Shell’s oil and gas reserves, may accelerate asset sales and extend stock buybacks to regain investors’ confidence.

Shell, based in London and The Hague, this year and in 2005 may sell chemical, and gas and power assets worth as much as $10 billion, including its share of chemicals maker Basell and power venture Intergen, analysts at Deutsche Bank AG said. The world’s third-largest oil company is scheduled to outline its strategy tomorrow in London, starting with a statement at 8:45 a.m.

“We’re talking about how much they will dispose and where they will make disposals,” said Tim Rees, a fund manager at Insight Investment Management in London, which oversees the equivalent of about $130 billion, including Shell shares.

Van der Veer, 56, wants to revive Shell’s standing with shareholders after it disclosed in January that it wrongly booked a fifth of its oil and gas reserves, leading to the departure of three top executives and $150 million in fines from U.S. and U.K. regulators. Shell cut its output forecasts in July, and analysts at Citigroup Inc. say Shell’s production may not rise until 2010.

“The market is looking for Shell to address some of the weaker areas of its portfolio through disposals,” said Jon Wright, an analyst at Citigroup in London. “The proceeds from such rationalization could be returned to shareholders.”

Piles of Cash

Oil companies are piling up cash from selling assets and rising oil prices, which reached a record $49.40 a barrel in New York last month because of increasing demand and a lack of spare production capacity. Shell in the first half reported net income of $8.66 billion, up 7 percent from the year-earlier period.

Shell’s shares were up 8.5 pence at 431 pence in London, and have gained 3.7 percent this year, less than a 19 percent rise at BP Plc. The shares have lagged those of Exxon Mobil Corp. and BP, its two larger competitors, in six of the past 10 years.

Shell is selling assets including gas stations in Spain, oil fields in Angola and pipelines in the U.S. As of July 1, it had announced plans to shed more than $3.5 billion of assets this year, almost double its original target for 2004.

The company may say it plans to direct capital to the oil and gas, or upstream, unit, where returns are typically higher than in other parts of the business, said Angus McPhail, an analyst at ING Financial Markets in Edinburgh, Scotland.

No Overnight Fix

“The prospect of an early recovery in Shell’s fortunes does not appear to be evident,” he said. “We consider it likely that Shell’s share buybacks will be extended from its existing $2 billion program this year to a similar level next year.”

Van der Veer last week in Vienna declined to comment on Shell’s strategy before the presentation.

As well as giving cash to investors by buying back shares, Shell is paying for cost overruns at some of its biggest projects, such as a $10 billion venture to tap natural gas off Russia’s Sakhalin island, which the company is counting on to boost output later this decade.

“Shell could increase the buyback, and I think the market would take that quite positively,” said Bruce Evers, an analyst at Investec Securities in London with a “hold” rating on Shell. “The worry is if they fritter away the disposal proceeds upstream, and returns plummet.”

Van der Veer in March said that high energy prices have made potential acquisition targets too expensive. Shell was criticized for paying too much in takeovers, such as the $6.2 billion purchase of Enterprise Oil Plc in 2002.

Missed Targets

Shell is targeting $2 billion of buybacks in 2004, less than BP and Exxon. In March, BP said it plans to return cash to investors whenever Brent crude is above $20 a barrel. Exxon Mobil in July promised to step up its buyback by $1 billion a quarter.

The reserves setback increased investor concern about growth in Shell’s oil and gas unit, which missed targets in 2001 and 2003. The company has failed to replace its production with new reserves in four of the last five years, according to the Securities and Exchange Commission.

On exploration, “they have been under-spending, which will have to change if they want to start growing,” said Ivor Pether, a fund manager at Royal London Asset Management, who helps oversee the equivalent of $8.5 billion and who is “underweight” in Shell shares. “I’d be cautious of assuming there’ll be too much surplus cash available to shareholders.”

The company lowered its production target again in July, forecasting output between 3.7 million and 3.8 million barrels of oil equivalent a day this year, and between 3.5 million and 3.8 million a day in 2005 and 2006.

Oil Prices

On April 29, Shell forecast investment of $14.5 billion to $15 billion this year. Shell and companies including Norsk Hydro ASA at a conference in Norway last month said they won’t accelerate drilling plans until they are convinced higher prices are here to stay.

Shell decided against giving a detailed update tomorrow on a review of its corporate governance and century-old dual structure while an internal team examines the implications of any changes. It plans to report the outcome in November.

“We will concentrate on the strategy,” Van der Veer told reporters in Vienna last Thursday. “Even if you would like to say something (on the governance review) you can hardly say anything next week until you have made the selection.”

Investor calls for changes in Shell’s dual structure have increased since the reserve cuts, and Shell began the review in March. Shell Transport & Trading Co. of London and Royal Dutch Petroleum Co. of The Hague are run by separate boards, an arrangement dating from their 1907 merger.

Unify Boards

Analysts such as J.J. Traynor of Deutsche Bank expect the company to retain its dual listing and unify its boards. Shell now is run by five boards of directors, and only this year placed an independent chairman on its U.K. board.

Shell’s setbacks started this year after it surprised investors by announcing in January that it had overstated its proven oil and gas reserves by 20 percent. Three more cuts followed, reducing Shell’s holdings as of 2002 by 23 percent.

Probes by the U.S. Justice Department, the Dutch securities regulator and the Euronext stock exchange are continuing.

To contact the reporter on this story:

Alex Lawler in London at [email protected]

To contact the editor for this story:

Last Updated: September 21, 2004 08:16 EDT

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