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New Shell CEO has toughest task in European business

Reuters

Wed Jul 1, 2009 4:40am EDT

By Tom Bergin – Analysis

LONDON (Reuters) – The new chief executive of Royal Dutch Shell Plc faces the tallest order in European business — to make his company the continent’s top earner this year, next year, and well into the next decade.

Peter Voser takes over as CEO of Europe’s largest company by market value on Wednesday. In recent years, Shell has set and then smashed European records for corporate earnings, notching up net profits of $31 billion last year.

A fall in oil prices hit first quarter profits, but crude has since more than doubled to above $70 a barrel, leading analysts to forecast that Shell is likely to top earnings tables again this year.

With a raft of big new projects coming onstream, Goldman Sachs reckons the oil major will have the best cash flow growth in the oil sector over the next three to five years, suggesting Shell is well placed to out-earn other European companies for some time.

However, investors are looking for much more from Voser, who until his elevation was Shell’s chief financial officer.

The 50-year old Swiss, who enjoys mountain hiking and football, will be immediately under pressure to start building a pipeline of new projects that will drive Shell’s growth into the second half of the next decade.

“We regard visibility around … production evolution post-2013, without imminent new project sanction, as low. We are worried that this leaves the investment thesis in stasis,” analysts at Citigroup said in a research note.

In the past two years, Shell has pressed the button on few big developments. Instead the company chose to hold off until rampant cost inflation in the sector, which had put the profitability of some planned ventures in doubt, cooled.

A raft of planned projects such as an expansion of its Athabasca oil sands project in Canada, the Sunrise liquefied natural gas (LNG) project in the Timor Sea and the Gorgon and Gladstone LNG projects in Australia, now await sanction.

However, big drops in the costs of building such projects have failed to materialize and the oil services sector is again starting to show signs of tightness, Martjin Rats, oil services analyst at Morgan Stanley, said.

Voser now faces the choice of stalling investments for even longer, or proceeding with projects which offer tighter margins. Either way, future profits may be at risk.

INVESTORS NON-PLUSSED

Investors generally welcomed the selection of Voser last year, to replace Jeroen van der Veer.

However, for some, this was more relief than joy.

“There was a dearth of viable candidates. He was the best but I don’t think there was a strong competition,” Stephen Thornber, fund manager at Threadneedle, said.

The first major strategic move Voser has fronted was a restructuring, announced last month, of Shell’s main operating divisions.

This is aimed at cutting costs and ensuring more projects are delivered on time and on budget.

Such plans are usually well received by the market but Shell’s shares fell on the day of the announcement, against a rise in the sector, partly because the company did not commit to any firm targets.

Voser, who has spent all his career in business and finance roles at Shell, save for a two-year stint as CFO of Swiss engineering group ABB, also takes the helm as Shell’s reputation on environmental and human rights issues frays.

A lawsuit filed in New York accusing the oil giant of complicity in the execution of human rights activists in Nigeria in the 1990s, which Shell settled earlier this month, renewed criticism of the company’s activities in Nigeria, often seen as the poster child for how oil wealth can damage a country.

Meanwhile, Shell’s investments in Canada’s oil sands, a dirty, energy-intensive activity whereby crude is squeezed from bitumen-soaked soil, and a row back from investment in renewable energy, have prompted the ire of environmentalists.

ON THE OFFENSIVE

Shell has reacted to the attacks on its green record by going on the offensive.

After being rapped by Dutch and British advertising watchdogs for making unfounded environmental claims, the company has stopped focusing on green energy in its commercials.

Instead it is talking about its efforts, and the world’s need, to make hydrocarbons greener.

Similarly, Voser, who is also a board member of Swiss bank UBS, is expected to go on the offensive against Shell’s financial challenges.

Some oil executives have criticized Voser’s lack of experience in exploration and production, traditionally the powerhouse of an oil company. Others say it is his strength.

“You have to have a clear view of the viability of what you’re going into so you can chose between projects. It will be a great help to him to have a financial background,” a senior Shell insider said.

Threadneedle’s Thornber agreed, saying that Shell has often allowed its engineers too much free reign.

“The reputation in the industry is that Shell over-engineers solutions. They pursue engineering excellence possibly at the expense of shareholder return. A man with a finance background might make more rational decisions,” he said.

(Editing by Sitaraman Shankar)

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