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Whatever happens, the world still needs what Shell provides

Times Online
The Times
October 31, 2008

Dominic Walsh: Tempus

Peter Voser, Shell’s newly appointed chief executive designate, has plenty to mull over before he takes up the reins next July.

The world’s second-largest listed oil company by valuation is a colossal cash cow but it is struggling to replace its reserves and sustain output.

So-called “easy oil”, the type that is cheap to find and straightforward to produce, is tough to find these days and many governments are increasingly reluctant to open their doors to Western oil leaders, except on punitive terms that even then are apt to change without notice.

At its third-quarter results yesterday, Shell said total production was 2.93 million barrels a day, the lowest level since 1991.

The falling oil price is not helping matters, particularly as Shell is more highly exposed than rivals to capital-intensive projects such as the development of Canada’s oil sands, which rely on very high crude prices to remain economic.

Such concerns – and another drop in the price of crude – help to explain why Shell’s shares slipped by just over 4 per cent yesterday, even as the group announced unexpectedly firm profits of $8.45 billion (£5.14 billion). That reflected the period when oil peaked at $147 this year and Shell is unlikely to enjoy such bumper headline profits next time around, with oil at less than half that.

Along with the rest of the market, Shell’s share price has nosedived recently. Nevertheless, investors scouting for value in beaten-up blue chips could do worse than take a second look at this FTSE stalwart.

With the shares trading at a multiple of about five times earnings, Shell now looks good value and the company is also trading at less than its book value. It could even benefit from the market turmoil by picking up assets on the cheap.

If Mr Voser is lucky, the current slowdown could offer the opportunity to rebuild its thin reserve base at relatively low cost. With huge cashflows and gearing of just 6 per cent, Shell’s balance sheet remains strong and the company is well placed to do deals.

Moreover, unlike many of its FTSE peers, Shell remains relatively resilient in the face of even a prolonged recession.

While demand for oil and gas is likely to ease in the next few months as the world’s economies slump – particularly in Europe and the US – Shell is a truly global business and energy demand in the developing world is likely to remain robust.

Equally, oil is hardly a luxury item that consumers will pass up altogether in tough economic times. Many believe that the recent slide in prices will be seen merely as a temporary lull.

With supplies constrained and demand expected to grow strongly in the medium to long term, Shell’s shares, off 70p at £16.35, could be well placed to prosper. Buy.

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