Shell weathering the storm

By ADRIAN LOWERY
Updated:

 

OIL giant Shell is preparing for a new phase in its history when its Dutch and UK parent companies merge this year. And now it has announced a quarterly dividend for the first time alongside its results for the three months to 31 March.

Shell logo

The world's third-largest oil group reported a 28% rise in first-quarter profits that beat average City expectations. It said current cost of supply earnings (the sector's preferred measure) rose to $5.55bn (£2.92bn). The consensus forecast was $4.7bn.

These figures confirm that Shell has maintained production at a high level to take advantage of soaring oil prices, as has the rest of the sector: BP on Tuesday reported a 29% surge to a record net profit for 2004, well ahead of City forecasts.

This week's figures are bound to raise motorists' hackles and increase calls for a windfall tax on oil profits.

Reserves scandal

Shell's underlying health is under question however. In a series of downgrades last year, it was forced to slash its estimate of proven reserves by six billion barrels, almost 30%. The changes came as it admitted having misled investors for years. The scandal shattered Shell's reputation and led to the sacking of three directors, including chief executive Sir Philip Watts and finance director Judy Boynton.

Moreover, Shell revealed recently that its ratio of reserve replacement had collapsed to a paltry 19% - the lowest of any oil major. That means Shell is finding less than a fifth of what it produces.

All the firm's directors missed out on bonuses in 2003 because of the accounting crisis. However, last year, Jeroen van der Veer, Watts' successor, was paid a total of £1.8m, the bulk of which was a bonus, after Shell posted record profits of almost £10bn.

Shoots of recovery?

Shell has been claiming over the past few months that it has addressed many of its problems and that the unification of the company structure and relocation of headquarters to Holland will lead to further streamlining and rejuvenation.

On Tuesday, however, the company found its attempts to look for new oilfields around the world had hit fresh problems in the Gulf, after a policy shift by the Omani government. This is seen as a minor setback, but given that van der Veer announced the last reserve downgrade as recently as 31 March, sceptics could contend that Shell is far from being out of the woods.

Financially robust

Experts argue, however, that the company is still financially very robust. Bruce Evers, oil analyst at Investec Henderson Crosthwaite, says that Shell should have no problem catching up lost ground in the next two or three years.

'It will be interesting to see how production volumes are holding up,' he told This is Money. 'We expect production levels this year to be at the lower end of Shell's guidance range. The reserve problems are still feeding through. But Shell should have no problem recovering its reserve base and production will be showing strong improvement by 2007-08.'

Crucially Shell's profits currently are relying on 'downstream' sources - refineries and petrol stations - rather than 'upstream' oil and gas production, from which its rivals are making most of their money. So if Shell's prediction of replacing 100% of reserves each year from 2006 is fulfilled the picture will be looking much rosier.

Corporate reform

As for the corporate unification, this might not in itself have such a profound impact on the recovery. Evers said: 'The company has always acted as one entity despite the dual board. The main impact should be that responsibility will be taken more clearly and decisions made faster: during the reserves scandal there was a lot of buck-passing between the two boards.'

One last possible threat to upset Shell's recovery is the prospect of a windfall tax on oil profits, although the Government has said it has no plans to introduce one.

Britain is of declining importance for Shell: only 950 of Shell's 40,000 petrol stations are here. The company has said that any windfall tax would threaten some of the 80,000 people employed by Shell in the UK, as well as many more across the North Sea oil sector.

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