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Tempus: Shell should ride out rough seas under its new Swiss captain

March 18, 2009

Shell’s new chief executive Peter Voser has a reputation for calmness, Swiss efficiency and being in the right place at the right time. At a moment like this, it may be just what the oil giant needs.

With crude prices still on the floor, Shell, like its peers, will face a tough year satisfying shareholders while still investing in the future. Oil at $45 a barrel means that Shell’s profits this year will drop steeply. The group has scrapped share buybacks and, to maintain its dividend and a $32 billion spending programme, it will have to raise its debt levels.

Happily for Mr Voser – who narrowly escaped being tarnished by the 2004 scandal over Shell’s misreporting of reserves – he will, when he takes over this summer from Jeroen van der Veer, inherit a business in much better shape than many of its rival oil supermajors. At BP, which is still struggling to find a new chairman, investors are still scratching their heads over whether the dividend looks secure this year.

Investors in Shell need not fret. At 6 per cent, the oil group has such low gearing levels that Mr Voser has plenty of headroom to take on debt if he needs to. The dividend looks secure, even if the current low oil price drags on for a year or more.

Meanwhile, Shell’s strategy of huge long-term investments in several big projects is starting to come to fruition. Projects in Sakhalin, Qatar, the Gulf of Mexico and Brazil are due to get up and running over the next two years Last year, as the oil market peaked, Shell also sensibly delayed a series of key investment decisions, which helped it to avoid being locked into a surge in industry costs. Instead, Mr Voser is well placed to take advantage of the downturn to proceed with them, but on much better terms.

The downturn could also play to Shell’s strengths in another way. For years, the international oil companies have been struggling to gain access to new production in oil-exporting countries. However, with low prices hitting national governments’ revenues, there is a fresh appetite to invite back technology-savvy Western oil groups to boost production.

All of this means that Shell is well positioned for an eventual upturn in oil prices – inevitable once demand recovers. However, that is not to say that there are not areas for concern. Shell is still suffering from the impact of security problems in Nigeria, where much production is based, and there are questions about whether President Obama may take a tougher line with oil companies on taxes. The company was also unable to offer guarantees on how it could continue to raise production more than four years out.

Overall, however, the new captain of the Shell supertanker looks well placed to ride out the rough seas ahead – and the low current valuations mean that this could be a good time to buy.

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