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BLOOMBERG: Shell Investors to Approve Merger, Making Purchases Easier

BLOOMBERG: Shell Investors to Approve Merger, Making Purchases Easier

Monday 27 June 2005

June 27 (Bloomberg) — Shareholders of Royal Dutch/Shell Group, the third-largest publicly traded oil producer, are set to back a merger of its Dutch and British parent companies, ending a century-old dual ownership structure that has hindered takeovers.

Investors including Craig Pennington, head energy analyst at Schroders Plc in London, which holds more than 2 percent of Shell’s U.K. shares, said they back the combination, to be voted on at meetings in London and The Hague tomorrow. Shareholders will receive stock in Royal Dutch Shell Plc in place of current holdings in Royal Dutch Petroleum Co., which owned 60 percent of the group, and Shell Transport & Trading Co., which held the rest.

The single share will allow Chief Executive Jeroen van der Veer to pay for acquisitions in stock for the first time, said investors including Derek Mitchell at F&C Asset Management in London. Van der Veer is seeking to rebuild a company that has misled investors for years about the size of its reserves.

“Given Shell’s reserves problem, without a doubt they will have to make acquisitions at some point,” said Mitchell, director of U.K. equities at F&C, whose team manages $3.65 billion, including Shell shares. “Now, with the single company, this will be possible with shares.” Mitchell said he backs the merger.

Shell has paid cash for acquisitions throughout its recorded history, preventing multibillion dollar transactions such as BP’s $56 billion stock purchase of Amoco Corp. in 1999 and the $31.8 billion acquisition of Atlantic Richfield Co. in 2000. Irving, Texas-based Exxon Mobil Corp. also has used shares for purchases. Both have overtaken Shell in size.

Surging Oil

Oil prices above $60 a barrel and rising energy demand in Asia are making acquisitions more expensive. Chevron Corp., the world’s fifth-largest publicly traded oil company, and CNOOC Ltd., China’s biggest offshore oil producer, are fighting for Unocal Corp. CNOOC last week offered $18.5 billion for Unocal, seeking to thwart a Chevron accord to buy the company.

Shell was fined by regulators last year and is being sued by shareholders for overstating its 2002 oil and gas reserves by 41 percent. The overstatement led to the ouster of its chairman, chief financial officer and exploration chief. The U.S. Department of Justice is conducting a criminal probe.

As the legal threats persist, Shell’s oil and gas fields are maturing from Oman to the North Sea to the Gulf of Mexico.

“An acquisition would address some of the issues that investors have,” Finlay MacDonald, who helps manage $20 billion of stocks at Britannic Asset Management in Glasgow, Scotland, and has been adding to Brittanic’s Shell position. MacDonald said he supports the merger.

Potential Targets

Potential targets include London-based BG Group Plc, whose Chief Executive Frank Chapman said April 4 he’s being asked “about once a week” if his company is an acquisition target. Occidental Petroleum Corp.’s Chief Executive Officer Ray Irani said any offer for his company would have to be about $40 billion in cash, a 29 percent premium to its last close, according to a June 5 report in the Los Angeles Times.

Shell’s ubiquitous red-and-yellow seashell logo, seen at some 40,000 service stations across 90 countries, harks back to the company’s 1833 origins when Marcus Samuel ran a shop in Victorian London trading seaside trinkets.

This transaction will close a merger of two companies that started with what Shell calls an “alliance” reached in 1907. Then, Henri Deterding of Royal Dutch agreed to bail out Samuel at Shell, which was struggling with too much debt. The deal then was to cooperate in all aspects of business, while maintaining separate identities, according to a Shell-sponsored history.

Shares of Shell’s U.K. arm plunged 7.5 percent on Jan. 9, 2004, when it first announced it had erred on reserves. Since then, higher oil prices have helped those shares rebound 39 percent, while Exxon Mobil gained 48 percent and BP rose 35 percent. Shell shares trade at about 10.8 times earnings, compared with 14 times at Exxon Mobil and BP’s 13.1 times.

`Confusion’

“The shares trade at a discount to their peers due to this structure, and getting rid of it will help the valuation,” said Gene Pisasale, an energy analyst at Wilmington Trust in Wilmington, Delaware, which has about 1.15 million Royal Dutch shares. “The existing share structure creates confusion in the marketplace.” Pisasale said he supports the merger.

Shares of the new company will start trading on July 20.

The change to a single company will boost Shell’s weighting in the FTSE 100 Index and some other U.K. stock benchmarks by 150 percent, forcing index-tracking funds to buy more of the company, if they haven’t already done so, when the new shares begin trading.

Shell Weighting

Since the transaction was announced in October, Shell shares in London have jumped 23 percent, more than double the gain of 9.2 percent at BP. Investors bought more Shell shares as they anticipated the merger will give the company a bigger weighting in the index.

Shell’s falling oil and gas reserves will take years to replenish. The company’s current five-year goal is only to replace each barrel of oil and gas that is pumped from the ground. Shell has 11.5 billion barrels of reserves, enough to last 8.5 years, according to Bloomberg data. Exxon Mobil’s 21 billion barrels can last 13.6 years, while BP’s 18.3 billion barrels will last 12.7 years.

“It takes a lot more than reclassifying shares to change a company,” said Neil McMahon, a London-based analyst at Sanford C. Bernstein & Co. McMahon rates Shell stock “market perform.” “Investors still need to see fundamental strength in the operations of the company.”

`Have to Buy’

Shell bought Enterprise Oil Plc, Britain’s largest independent producer, for $7.3 billion in June 2002 and Pennzoil- Quaker State Co. for $2.9 billion in March 2002.

“With all that has happened to Shell, they probably have to buy something to fill the holes,” said Eric Sananes, who manages an energy equity fund and commodities fund for Banque d’Orsay in Paris and doesn’t hold the shares. “That’s why I’ve stayed away from the shares. They are due to acquire something and will have to pay high prices.”

Van der Veer, a 57-year-old Dutchman, on April 28 said he prefers to expand Shell’s own projects because high oil prices make energy acquisitions too costly.

“If reserves can be acquired cheaply it’s obvious they will go down that route,” said Ian Henderson, who manages about $2.5 billion for JP Morgan in London, including the JPMorgan Fleming Natural Resources Fund. For now “the focus seems to be making better use of the expertise that is in the company, they are trying to refocus the company. They’ve got enormous projects in Russia and the oil sands in Canada.”

Henderson said he supports the merger.

To contact the reporters on this story:

Stephen Voss in London at [email protected]

Tom Cahill in Paris at [email protected]

http://www.bloomberg.com/apps/news?pid=10000102&sid=aVgidzqjbmKc

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