Hemscott: Shell ‘overvalued’

US broker JP Morgan cuts its rating on Shell, arguing that the oil giant’s results could disappoint.

25/01/08 08:13

JP Morgan downgraded Royal Dutch Shell to “underweight” from “neutral”, telling clients: “We think near-term newsflow could undermine confidence in Shell’s longer term prospects and cause the shares to underperform their peers.”

Namely, JP Morgan’s team expects Shell’s production volumes will fall 3% in 2008, against consensus expectations for flat a flat outturn. A combination of natural declines, a lack of large start-ups, and pricing effects from the group’s production-sharing contracts will offset improved figures from the likes of the Ormen Lange gas field in Norway, it said.

“While the longer term outlook for Shell’s volumes looks reasonable, we think near-term guidance could cast a shadow over the longer term,” analysts Gordon Gray and Kim Fustier told clients.

The broker also noted that Shell will not be publishing reserve replacement data at its full-year results, instead releasing the data instead in a US regulatory filing some time after.

“We expect this lack of clarity around results to be treated with a degree of scepticism in the market although quite common practice in the US, it would represent a change of policy for Shell,” Fustier and Gray wrote.

The reserve replacement data, when it comes, will be affected by the deconsolidation of the Sakhalin field in Russia, where Shell has cut its ownership to 27.5% to appease the Kremlin. This will remove 1.1bn barrels of oil equivalent from the company’s proved reserves, equivalent to nearly a year of group worldwide production, JP Morgan said.

It also noted that there are few major projects coming on stream, and is vulnerable in Nigeria due to the unrest and other related issues. Shell currently has 1.1bn barrels of proved reserves in Africa, or 8% of its worldwide total, with the bulk in Nigeria.

Any disappointment “will lower Shell’s reserve life further and could harm confidence in future prospects,” the analysts argued.

Shares in Shell rose 14p at £18.13 in opening trade, mirroring a strong trend in the wider market. JP Morgan set a £20.50 long-term price target on the stock despite its gloomy view on the short term.

“We can see 5-10% downside vs key peers in the coming months but for longer term investors willing to look beyond this turbulence, we would view this weakness as a buying opportunity,” the broker concluded.

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