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Financial Times: Open season on oil companies

By Andrew Hill, Mure Dickie and Richard Milne
Published: January 31 2008 18:08 | Last updated: January 31 2008 18:08

“Obscene” profits and calls for “windfall taxes”: it’s oil company reporting season again. Royal Dutch Shell formally launched the 2007 full-year results festival in the UK on Thursday by recording the largest profit ever reported by a European company – $27.6bn after tax, adjusted for changes in the value of fuel stockpiles.

If the chorus of complaint from UK unions and environmental groups at the “£1.6m-per-hour” profit was predictable, so was the reaction of analysts: disappointment. Fourth-quarter net income was slightly below the market consensus. If the company reaped a bonus from the higher oil prices last year, it had to use it to offset lower production.

That is one reason why Jeroen van der Veer, Shell’s chief executive, deemed the numbers merely “satisfactory”. The reality is that as fast as Shell pulls in profit, it is having to reinvest it to prepare for the future. The group’s capital expenditure for 2007, excluding acquisitions and disposals, was $25.5bn – itself almost certainly a record or near record.

That figure will rise again in 2008 to $28bn-$29bn – £1.7m per hour.

As for “profitability”, rather than profit, analysts point out that cost inflation in the past two years of rising oil prices has curbed oil majors’ profitability – as measured by return on capital employed. Returns have been, at best, flat and are projected to fall in the years ahead.

Production of “easy oil” and “easy gas” – reserves that are close to markets and relatively simple to extract – should peak by 2015. That will push Shell out into the literal and metaphorical deep water in a search for what it calls “unconventionals”. Some of these reserves have to be squeezed out of the dirt – which is not cheap. The fall in the share price on Thursday put Shell on a forward multiple of about 9 times forecast earnings for 2008. Some analysts consider it a short-term bargain. But over a longer period, the destiny of Shell and its developed world peers is to run as hard as it can – not to catch a windfall, but to avoid a downfall.

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