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Market miscellany: It’s too early to buy Shell

Sunday Telegraph: Market miscellany: It’s too early to buy Shell

“Over the past year Shell has made a habit of delivering nasty surprises, notably its disastrous admission in January that it had overbooked its proven oil and gas reserves by 25 per cent. Last week the oil giant’s long-awaited strategy presentation for once contained no surprises – but it didn’t impress either.”

Edited by Grant Ringshaw

(Filed: 26/09/2004)

Over the past year Shell has made a habit of delivering nasty surprises, notably its disastrous admission in January that it had overbooked its proven oil and gas reserves by 25 per cent.

Last week the oil giant’s long-awaited strategy presentation for once contained no surprises – but it didn’t impress either. The presentation went some way towards addressing Shell’s fundamental problem – the need to find more oil and gas reserves.

Sensibly, the oil giant has pledged to spend $15bn a year between now and 2006 on capital expenditure, with $1.5bn earmarked for exploration. It is also hoping to sell off $10bn to $12bn of non-core assets.

Unfortunately, it takes a long time to turn a supertanker around. The company’s strategy to focus on building long-term “legacy” projects that will last for 20 to 30 years is sensible, but production will remain flat until 2009. The company also admitted that its reserve replacement rate would be only 100 per cent over the next five years – well below its rivals.

Shareholders were also disappointed that the company made no promise to hand back cash – in contrast to rival BP – although it has pledged to keep increasing its dividend. Shares in Shell (407.25p) have regained some of their losses in recent months, but are still trading at a discount to its peers.

Longer-term investors should wait until November’s corporate governance review to gain a better insight into whether the company has turned the corner. A positive update might be a catalyst to buy the shares, but for now investors looking for short-term gains should steer clear.

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