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Shell Plan Disappoints Investors

Financial Times: Shell Plan Disappoints Investors

“Scandal-hit oil giant Royal Dutch/Shell will invest $45 billion over three years to boost reserves and production but its shares fell on disappointment it did not extend a stock buyback program.”: “Shell’s reserves cut caused the ousting of its previous top directors, led to $150 million in regulatory fines and cost the group its “AAA” top-grade credit rating.”: “Shell is such a long turnaround story that BP looks a less risky bet,’” said Cavendish Asset Management fund manager Paul Mumford.”

By REUTERS

Posted 23 Sept 04

LONDON (Reuters) – Scandal-hit oil giant Royal Dutch/Shell will invest $45 billion over three years to boost reserves and production but its shares fell on disappointment it did not extend a stock buyback program.

Shell, the world’s third-largest oil company, had shocked investors in January by slashing its proven oil and gas reserves by 20 percent. Subsequent smaller reserves cuts further dented investor confidence.

In a strategy presentation on Wednesday, Shell said it would spend a total of $15 billion a year in 2004/06, mostly on major gas and oil projects. It also plans to sell assets worth $10-$12 billion over the period to strengthen its finances.

However, Shell shares fell 2.6 percent from Tuesday’s 12-month high in London to 421 pence in afternoon trade, as analysts said the group could have made a more explicit promise to extend its share buyback program.

The stock was also down 2 percent in Amsterdam.

Some analysts and fund managers said that Shell’s capital expenditure, which compares to annual spending of $14 billion at larger rival BP, was higher than expected.

“They missed a golden opportunity to announce an extension of the share buyback program. I don’t think they’ve done enough,” said ING analyst Angus McPhail, who has a “hold” rating on Shell.

Shell’s reserves cut caused the ousting of its previous top directors, led to $150 million in regulatory fines and cost the group its “AAA” top-grade credit rating.

Since then, the company’s new boardroom led by Chairman Jeroen van der Veer and Managing Director Malcolm Brinded has worked hard to regain the trust of investors.

Shell said dividends remained a priority and that it planned for payouts to grow at least in line with inflation.

Van der Veer said Shell could do more share buybacks if oil prices remained high, but added he preferred not to make a firmer commitment.

“We prefer not to give promises we may regret next year,” he told reporters in London.

Canada Life fund manager Dave Bradbury said the presentation was a “little disappointing” and added that capital investment was a bit higher than forecast.

However, Bradbury said record oil prices meant that the oil sector remained an attractive one for investors.

Oil prices have soared amid instability in the Middle East and Russia, and Jupiter Asset Management director Tony Nutt said he was comfortable holding Shell shares in his portfolio.

“Shell was never going to be a rapid turnaround, but they’ll be aided by the strong cash-flow from high oil prices,” he said.

BOLSTERING RESERVES

Shell said it expected its proved reserve replacement ratio to average at least 100 percent in the period 2004/08 — versus 60-80 percent in 2004 — and said it would focus on major wells in areas like Nigeria, Kazakhstan, Egypt and the Gulf of Mexico.

Shell said it would also focus on its market-leading position in the liquefied natural gas sector, and that out of the planned annual $15 billion of investment, some $11.5 billion would be spent on exploration and production.

Shell reiterated production would fall from 3.7-3.8 million barrels of oil equivalent per day in 2004 to 3.5-3.8 million in 2005/06. This is in contrast to the world’s No. 1 and No. 2 oil companies, Exxon and BP, where production has risen.

However, Shell said production would rise to as much as 4 million barrels in 2009.

Shell has also embarked on a major asset sale program. The group has already earmarked for sale its Basell chemicals joint venture and InterGen power unit.

Shell added on Wednesday it had received an approach for its global liquid petroleum gas distribution and marketing business.

Van der Veer said Shell was working hard toward completing a review of its corporate structure, which is due in November.

He said Shell was considering unifying the boards of its Dutch and British holding companies, which has been long sought by many investors to improve Shell’s corporate governance.

Shell shares have recovered since the January downgrade, but they have still underperformed BP and Exxon.

“Shell is such a long turnaround story that BP looks a less risky bet,” said Cavendish Asset Management fund manager Paul Mumford.

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