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DAILY TELEGRAPH: New Shell formulation will take time to settle down

DAILY TELEGRAPH UK: New Shell formulation will take time to settle down


More news from Shell this week, except thankfully it was nothing to do with losing reserves. The oil giant has unified its dual corporate structure to create Royal Dutch Shell.

There are now two lines of stock traded in London. Shell A shares, which originate from the former Dutch parent Royal Dutch Petroleum, and Shell B shares, which replace UK arm Shell Transport and Trading.

With all the shares in the new company now traded on the London Stock Exchange, the number of shares – and its market capitalisation – has more than doubled. Investors’ holdings in the unified group have changed too. Shell Transport investors have received 28 Royal Dutch Shell B shares for every 100 Shell shares held – that is why the Royal Dutch Shell B shares are trading at around 3.5 times the price of the old Shell shares.

Royal Dutch Petroleum shareholders collected two Royal Dutch Shell A shares for every old Royal Dutch share.

Other ratios affected by the increase in the number of shares in issue are earnings per share and dividend forecasts for this year, which jump to 169.9p and 63.1p respectively.

From a corporate perspective, the main difference is that Royal Dutch Shell will find it easier to issue new shares to fund acquisitions, which was difficult under the old dual structure.

Shell’s production is still likely to lag arch-rival BP because it did not invest in more production in the late 1990s. However it is sensibly using the high oil price to invest heavily in exploration, which should start to yield benefits by the end of the decade.

With such a complex shake-up, analysts’ forecasts are yet to settle down, which explains our sparse table, although one prominent US investment bank increasing its price target for the B shares to £20.65. At yesterday’s closing price of £17.95, Royal Dutch Shell B shares trade on 10.6 times prospective 2005 earnings, yielding 3.5pc. On this basis, the shares are cheap and rate a buy for a long-term.

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