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Slick display glosses over difficulties

Financial Times: Slick display glosses over difficulties

“While most observers agreed that its presentation was slick and thoughtfully put together, the lack of underlying substance was also apparent to some.”: “To shift attention away from the reserves debacle, Mr Brinded pointed out that Shell’s underlying resources were still some 60bn barrels of oil, the same as before the reserves readjustment. However, one analyst said Mr Brinded’s highlighting of the 60bn barrel figure was misleading…”

By James Boxell

23 Sept 04

According to analysts, Shell missed a golden opportunity to re-establish its credentials with the market.

While most observers agreed that its presentation was slick and thoughtfully put together, the lack of underlying substance was also apparent to some.

As Peter Nicol, analyst at ABM Amro, puts it: “The challenge is what they do this decade, but all the big projects they mentioned on Wednesday point to the next decade. The presentation really underlines the challenge they face in their upstream business over the next few years.”

A sense of urgency was one of the key themes in Wednesday’s presentation, with Jeroen van der Veer, the chairman, repeating the word several times and saying the company needed “action not words”. Malcolm Brinded, head of the all-important exploration and production business, also picked up on the theme, saying his division could “not afford to waste time”. Obviously, Shell has been stung by the perception of it as slow-moving, bureaucratic and deeply conservative.

However, analyst reaction suggested that, despite all the talk of speed, there was nothing to suggest a quick fix for Shell’s ills in the next few years.

Shell is expected to finish the decade with production similar to 2000 levels and oil reserves weaker. This at a time when its rivals at ExxonMobil, BP and Total have forged ahead.

Mr Brinded repeated that he expected a low point in production between 3.5m and 3.8m barrels a day in 2005 and 2006 and would be “disappointed” if it did not return to approaching 4m by the end of the decade.

He said it was the company’s “aspiration” to hit 4.5m to 5m barrels a day within 10 years.

Richard Rose, analyst at Oriel Securities, believes Shell could be forced into an acquisition to help it boost its reserves and production profile.

However, with oil prices as high as they are, Mr van der Veer and Mr Brinded admitted finding a bid target that would not destroy value could be difficult.

Mr Brinded was “conscious of high prices” but said the company would “keep looking for opportunities”. Mr van der Veer said the company “had the balance sheet muscle” for significant acquisitions.

Other analysts pointed to Russia, where BP and Total have struck deals but, while Mr Brinded said he was always open to opportunities, a Russian corporate deal was not a key strategic goal currently. Shell has a 55 per cent stake in the huge Sakhalin II project in the far east of Russia.

To shift attention away from the reserves debacle, Mr Brinded pointed out that Shell’s underlying resources were still some 60bn barrels of oil, the same as before the reserves readjustment. He said Shell could unlock 13bn barrels of oil from these resources in the next five years, which would help it meet its reserves replacement target. It would replace 100 per cent of the oil it took from the ground in the next five years, up from a figure between 60 and 80 per cent this year.

However, one analyst said Mr Brinded’s highlighting of the 60bn barrel figure was misleading, as there were guidelines on what oil can be classified as commercially recoverable. “Much of the oil in the ground they mention may be commercially recoverable,” the analyst said. “But some of it may not.”

There was also unhappiness about the apparent downplaying of the chances of share buy-backs. Because of its need to find reserves and increase production, Shell clearly needed to commit itself to spending its way back to health, but after a commitment to a dividend policy at least in line with inflation, those awaiting share buy-backs will find themselves at the back of the queue.

As Mr Rose at Oriel says: “The fact that capex is soaking up much of the cash means there is less for buybacks and less for dividend increases.”

Other analysts question why Shell needs to be so excessively cautious about its borrowing, with gearing sitting at about 15 per cent. “They take great pride in their strong balance sheet,” says one. “But how the hell are they going to use that with oil prices as strong as they are. They seem more concerned about their credit rating than their shareholders.”

Shell’s peers have an average shelf life for their oil reserves of about 13 years, while Shell’s has dwindled to about 10 years.

While Mr Brinded highlighted the chances for 100 per cent reserve replacement over the next five years, this still leaves Shell’s oil reserve shelf life at 10 years – meaning it is standing still in relation to its peers.

To get back to the level of its peers, Shell will need 130 per cent reserve replacement, says one analyst.

The announcement of a $10bn-$12bn asset disposal programme was welcome, as was the merger of its downstream businesses, and its gas business is a star performer with a great future.

However, if it is going to catch up with its peers on the more central matter of its oil reserves, then more concrete measures clearly need to be taken.

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