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The Times: Even in hard times, you can still be sure of Shell

July 27, 2007
Nick Hasell: Tempus

The City can be hard to please, as Jeroen van der Veer, the chief executive of Shell, will doubtless tell you.

Yesterday’s second-quarter profits of nearly $7.6 billion (£3.7 billion) were the best produced by the Anglo-Dutch oil major to date, and $1.5 billion more than those unveiled two days previously by BP. Yet the overwhelming reaction from analysts and investors was disappointment.

They pointed out that over the past seven years Shell has beaten forecasts by an average of 4.6 per cent. Once $660 million of one-off gains are stripped out of yesterday’s numbers, Shell has beaten forecasts by only a modest 2 per cent.

True, Shell has benefited from a sector-wide surge in refining margins – caused, ironically, by BP’s refining shutdowns in the US. The more capacity BP has been forced to take off the market, the more petrol prices have climbed. But Shell also disappointed on production, and continuing turmoil in Nigeria – where it has yet to give a date on when it will restart operations – means the group may reach only the bottom of its targeted output range of 3.3 million barrels a day this year.

Of course, shareholders always look forward. But it is important to remember where Shell has come from. Just three years ago, it was mired in the reserves scandal that catapulted Mr Van der Veer to power. He has since increased Shell’s exploration budget to $2 billion a year, and invested far more in new technologies. The company is better placed than BP on liquefied natural gas (LNG) and has a leading position in oil sands – a division whose results it will henceforth report on a standalone basis.

That is not to ignore the hole in its production pipeline – Shell’s output is 600,000 barrels a day less than BP – it needs to fill. But if Shell’s profits underwhelmed, that is also because of higher write-offs in its exploration expenditure during the past six months. It has made four big discoveries in that time, one of which – Prelude off Australia’s northwest coast, adjacent to Total’s Icthys gas project – carries high hopes.

Like other “super-majors”, Shell’s shares continue to suffer from a conglomerate discount. But the scope for the company to step up its share buyback programme, and the premium that should attach to its lead in LNG, provide support. At £19.72, or 10.5 times current-year earnings, Shell is worth holding.

http://business.timesonline.co.uk/tol/business/markets/article2148265.ece

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