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Financial Times: Much agonising over what to do

Financial Times: Much agonising over what to do

Tuesday 28 June 2005

The shareholder base of Royal Dutch and Shell Transport and Trading is so varied that investors inevitably disagree on whether the restructuring marks the end or the beginning of reform for the group, writes Sundeep Tucker.

At the height of the scandal last summer over the level of oil reserves it had booked, Jeroen van der Veer, the group’s lead executive, held a number of meetings with shareholders in the US, The Hague and the City of London. The discussions centred on investor demand for a structure that would foster accountability and transparency in decision-making.

Investors say it took several meetings for Shell executives to accept that the status quo was not an option. A year on, investors hope the combined structure will help prevent any future scandal. Few are entirely satisfied, though, and remain watchful lest Shell slip back into its secretive previous ways.

Arik Breen, head of corporate governance at Robeco, a leading Dutch asset manager, says accountability should improve as a result of the changes and praises Shell for a “constructive dialogue” with investors. However, he hints that other concerns remain, saying: “We will wait for the company to complete this phase first before identifying further issues.” Other Netherlands-based funds also say they will have more to add once the annual meeting has passed.

Among the more bullish about Shell’s prospects is Knight Vinke Asset Management, a US-based activist investor financially backed by Calpers, the California state pension fund. Knight Vinke played a key role last summer in communicating investor concerns to Shell executives.

Eric Knight, Knight Vinke managing director, says Shell has “fabulous assets” and a radically better management structure than in January 2004, when the group first revised its reserves numbers. “Shell will now have a proper CEO. Van der Veer is in a much stronger position now than under the old structure,” he says, though adding: “Perhaps Shell is not as smooth at communicating its strengths as some of its rivals.”

Mr Knight says he will watch for the impact of share buybacks, index funds and the oil price on the Shell share price. “The key issue is reserves and exploiting them without cost overruns. . .There is a definite sense of improvement. We will now look to see that they don’t rush to do something that destroys value.”

Robert Talbut, chief investment officer of Royal London Asset Management, says the reforms announced so far should “not be viewed as a panacea”. He adds: “The new corporate structure will make Shell more efficient and dynamic and hand it the potential to outperform its rivals once again” but warns that “Shell is still saddled with the fact that five to 10 years ago it didn’t find enough oil. It is making progress but this company will not be turned round overnight.”

Jim Stride, managing director of UK-based Axa Investment Managers, says: “The new corporate structure will give them the flexibility to compete for purchases of oil and gas companies.”

The biggest short-term question for investors is whether to adjust their holdings as a result of the ending of the dual-company structure. Former Royal Dutch stock listed in the UK will be known as A shares; Shell Transport stock will be listed as B shares. The former are expected to trade at a discount to B shares, be favoured above B shares for share buybacks and, for UK-based investors, be subject to higher tax than B shares.

UK investors say they accept that the A and B split was a by-product of the abolition of the dual-company structure and do not expect it to inhibit Shell’s ability to fund acquisitions.

However, Mr Stride says there is a dilemma: “Should we sell our B shares and acquire more A? We haven’t decided. It is highly complex and we have spent several hours and meetings agonising over what to do.”

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