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The Sunday Times: There’s a way to become sure of Shell

July 1, 2007
Inside the City
Grant Ringshaw

THREE years ago, Royal Dutch Shell was in turmoil. The reserves-reporting scandal wiped billions off its stock market value and led to a boardroom clear-out. A mountain of lawsuits and regulatory probes threatened to engulf the company.

Yet under the leadership of Jeroen van der Veer Shell has cleaned itself up and gained a new confidence. The antiquated dual board and dual listing structure has been scrapped. Shell is a leaner and fitter machine posting record profits for a British company of $25 billion (£13 billion) last year and beating forecasts in five consecutive quarters.

Van der Veer has set out a clear strategy – expanding upstream and making downstream more profitable in the face of relentless competition for resources from national oil companies. That has meant taking some big bets on long-term projects as Shell pushes into “unconventional” oil exploration and production – the huge oil sands project in Canada, for instance, and a big play in converting gas to liquids in Qatar. The performance of its downstream business, from refining to petrol stations and chemicals, has also been sharpened up.

It has not all been good. Shell got a bloody nose in Russia where it was forced to cede control of the giant Sakhalin-2 project to Gazprom. Meanwhile, production growth will be sluggish at 1%-2% a year until 2010 before accelerating to 3%-4% if the big investments start to pay off.

Van der Veer is playing a long game, but investors have failed to appreciate the true value of the company, according to research published last week by analysts at Morgan Stanley. They argued that Shell is undervalued by a staggering $120 billion. On a conservative estimate, Shell should be worth $384 billion, about 45% higher than the current £130 billion market value.

Part of the problem is that European supermajors have been unloved for years. The debate among investors is whether big oil companies can invest in projects that will consistently deliver returns above the cost of capital. But Morgan Stanley deliberately does not factor this in – its valuation is based on the upstream business and reserves (worth $210 billion) and the refining, gas and power, marketing and chemicals operations ($174 billion).

Morgan Stanley’s numbers may look a bit punchy, but they highlight that Shell looks incredibly cheap. As the investment bank points out, the big question is how to unlock the value. A transforming deal looks unlikely, though a merger with BP, rumoured in the past, has sound logic.

Shell looks too big and complicated for private equity, but pressure from activist investors could perhaps emerge.

Van der Veer has made Shell much more sure-footed. His challenge is to wean the market off its emphasis on exploration and convince it of the value of existing assets. Perhaps then, investors can be sure of Shell. and its sister non-profit websites,,,,,, and are owned by John Donovan. There is also a Wikipedia feature.

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