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Stars aligning for Royal Dutch Shell Stars aligning for Royal Dutch Shell

Tuesday 28 June 2005

Rising crude price, index reweighting giving a boost

By Steve Goldstein, MarketWatch

LONDON (MarketWatch) — For a company recovering from a scandal surrounding its overstatement of proven oil reserves, the stars could hardly be aligning better for Royal Dutch Shell.

Shell (RD: news, chart, profile) (SC: news, chart, profile) , like the entire energy category, is benefiting from record crude-oil prices that have now topped $60 a barrel.

And, assuming shareholder approval Tuesday of the merger of its Dutch-listed company, Royal Dutch Petroleum, which presently holds 60% of assets, with U.K.-listed Shell Trading and Transport, which holds 40%, it should get a lift from index funds as well as more active investors having to meet the company’s increased standing in the FTSE 100 index as well as other European indexes.

“Nobody wants to not own this stock at the moment,” said Colin Morton, a fund manager at Rensburg Investment Management, pointing to the oil price and the reweighting.

The market, to an extent, has priced in part of the technical reweighting.

Shell Trading ADRs have risen 10.5% year-to-date, compared to an 8.7% rise for rival BP’s U.S.-listed shares.

But most analysts believe there’s more index reweighting buying on tap, with expectations that index funds will load up on the shares two to three weeks before the July 20 effective date of the proposed merger.

Merrill Lynch has calculated that investors will need to buy 1.8 billion pounds ($3.3 billion) of shares to be neutral against index benchmarks.

Even investors who bought into Shell a day before it first announced that it had overstated oil reserves, in January 2004, have seen shares appreciate 23.9%. True, that’s not as good as a 27.8% rise in BP shares and a 41.5% advance for Exxon Mobil (XOM: news, chart, profile) , but it’s sure a lot better than the 1% fall in Dow industrials ($INDU: news, chart, profile) over the time frame.

The question, of course, is where Shell will go from here. The company, which slashed 1.4 billion barrels of oil and oil equivalent from 2003 proven reserves, said its reserve replacement ratio for 2004, excluding divestments, was 49%, meaning the company drew roughly two barrels out of the ground for every one it had in proved reserves.

Shell has set a goal of a 100% reserve-replacement ratio over the 2004 to 2008 period.

With a unified structure, Shell would be able to make deals with shares rather than cash, which it has used in the past.

BG Group (BRG: news, chart, profile) (UK:BG: news, chart, profile) is one possible candidate that could Shell could buy to boost reserves.

“BG’s been a perennial bid target for as long as I can remember,” Morton said.

Of course, Shell’s acquisitions haven’t always proved successful.

“Shell did buy Enterprise Oil and that didn’t solve their problems,” said Richard Brakenhoff, an analyst with Rabo Securities, referring to the June 2002’s $7.3 billion deal.

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