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The Times: BP and Shell facing investor pressure as US rival’s stock rises

Monday, January 29, 2007
Carl Mortished, International Business Editor
BP and Royal Dutch Shell face bruising encounters with shareholders over the next fortnight as the two European oil giants try to explain at strategy presentations why a year of record oil prices has failed to generate good investment returns.

Fund managers are shunning BP, Britain’s largest company, and its Dutch rival, turning up their noses at slipshod management, political risk and poor operational performance. Instead, they have chased ExxonMobil stock, lifting shares in the American company to extraordinary premiums over its European rivals.

Over the past year BP has lost almost £30 billion in market value, while Shell has shed £12 billion. For BP, the valuation watershed coincided with last summer’s agony in Alaska, when it shut a big part of oil production at Prudhoe Bay after finding corrosion in pipelines.

To add insult to BP’s injury, investors responded by bidding up the value of Exxon. Since the beginning of last summer, $100 billion has been added to the market value of the American oil company.

In a strategy presentation on Thursday, Shell is likely to shave its forecasts of oil output in 2007 and will lower the gauge on its fuel tank by about 10 per cent, removing a chunk of reserves after the forced sale of part of the Sakhalin-2 project in Russia to Gazprom.

On Tuesday of the following week, BP, which is led by Lord Browne of Madingley, will be forced to eat humble pie, reviewing a year of missed oil and gas production targets and a very weak downstream performance in which its managerial competence was challenged in the Baker report into safety in its American refineries.

The flight to Exxon is explained as a retreat to a safe haven, but the big divergence between the European and American share performance puzzles investment analysts. Lucas Hermann, of Deutsche Bank, says that the valuation gap is too wide. “Historically, Exxon has generated better returns, but at the moment the premium is extreme,” he said.

It is about Exxon’s ability to make more dollars per barrel. The three sisters of oil produce 3.5 million to 4.1 million barrels of oil and gas a day, but the market reckons they have widely differing abilities to generate profit per barrel. Each BP barrel produced is valued at $52, but an Exxon barrel is worth $107.

Confusing the picture further are the soaring shares of some national oil companies. If the Exxon surge represents a flight to quality and certainty, how is Rosneft’s rise to be explained? Since the Russian state oil company made its public offer in July, its stock has soared, shrugging off the tumbling oil price. As investors clipped tens of billions of dollars from BP’s wings, they adorned Rosneft. The Russian group is valued at $82 billion (£41.8 billion), a 17 per cent gain in six months.

The logic, if any, lies in rivalry for new barrels. Rosneft’s Kremlin ties suggest that it will win access to Russia’s best exploration prospects. Hence Shell’s plight. It has the weakest oil and gas reserve position of the three sisters, but that view fails to recognise its vast holdings of oil sands, excluded from reserve figures by US rules. Meanwhile, Exxon’s big reserve rises last year were almost all accounted for by North Dome, a gasfield in Qatar, remote from Western markets and shared with Iran.,,9072-2571578,00.html and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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