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FINANCIAL TIMES: Lex: Marathon task: “Shell’s reserves problem remains”

FINANCIAL TIMES: Lex: Marathon task: “Shell’s reserves problem remains”

29 April 05

In the 1960s film The Loneliness of the Long Distance Runner, the protagonist toiled across rough terrain as punishment for prior transgressions. Shell must know how he felt. Since last year’s initial reserves downgrade, the Anglo-Dutch oil major has made big strides in restructuring, returning cash and redeploying capital. As with arch-rivals ExxonMobil and BP, first-quarter results for 2005 beat expectations.

The big surprise was a cyclical upswing in petrochemicals. But Shell’s reserves problem remains. Its target of replacing all production across 2004-2008 implies an average renewal rate of at least 125 per cent a year from 2006. That would be quite a turnround, particularly with industry costs rising. Shell needs its longer-term, big-ticket projects to deliver.

Unfortunately, competitors will not wait and short-term capital markets tend to discount long-term gains. Reserves lives of over 12 years at Exxon and BP overshadow Shell’s nine. Shell might be tempted to buy its way out of trouble – gearing is just 17 per cent. But that would not be cheap. Asset swaps would make more sense.

But finding a partner willing to give up jam today will be difficult. Shell now trades broadly in line with BP on a 2006 enterprise value to debt-adjusted cash flow multiple of 9 times. But technical support from the unification of Shell’s shares will unwind after the summer, just as BP’s new production projects refocus investors on fundamentals. Shell will need to run hard just to stand still.

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