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Daily Telegraph: Shell may have something in reserve but just now it's unproven


The Questor column

Edited by Helena Keers (Filed: 09/04/2004)


Shell has been gushing bad news since early January when the Anglo-Dutch giant announced that it had overstated its "proven" oil and gas reserves by 20pc, or 3.9billion barrels.


Since then, the company has lost its chairman and head of exploration and production, as well as being forced to address concerns about its unwieldy corporate structure.


Shell has also added 250m barrels to the "unproven" pile - now totalling 4.1billion barrels - and hired consultants to double-check the rest of its "proven" reserves.


Not surprisingly, the bad news has hit the share price. On January 8, the day before the first reserves statement, the shares closed at 401.25p. Three months later, they were down 8pc, closing marginally up 1.75p at 369p.


So, does this make Shell a buying opportunity? Despite the company's management problems Shell's fundamentals remain strong. After all, most of the unproven oil and gas barrels are still there. Shell's mistake was to book them before it was allowed to under rules set by the Securities and Exchange Commission.


The oil price, still above $30, is also guaranteed to ensure that Shell will keep posting strong profits - despite the concerns about its management.


The company has also been signing some diverting deals, notably in Libya, where Shell hopes to lead the way in exploiting the natural gas assets.


But there is still the possibility of more bad news from the oil giant. At last month's update, Shell said it had rechecked 40pc of its oil and gas reserves.


With 60pc to go, there is still scope for more reserves restatements.


Trading on 14 times prospective earnings, with a 4pc forecast yield, Shell is a slick 23pc cheaper than its rival BP. This makes it look like a (risky) buying opportunity, but until there are signs that the management is addressing the problems Questor thinks it best to hold.

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