Royal Dutch Shell Group .com

BARRON’SOnline: Fuel for Thought


Despite investors' skepticism, the energy market will stay strong, says a veteran investor



MONDAY, MARCH 29, 2004   


An Interview With Art Smith -- As keeper of perhaps the most comprehensive financial databases of worldwide energy companies -- they track 400 publicly held companies -- Smith and his team of analysts at John S. Herold Inc., are much in demand by the world's money managers, investment bankers and oil and gas executives. In the 20 years since Smith acquired control of Herold in a leveraged buyout, he has built the firm into a powerhouse of petroleum research and advisory services, with 70 employees and offices in Houston and in Norwalk, Conn. Smith has devoted his career to the study of black gold.




Q: What do you make of the difficulty oil companies seem to have in estimating reserves?


A: The Royal Dutch/Shell saga has yet to run its course. It can be argued that the reserve problem came about because the executives have been under pressure to show good reserve volume additions and keep finding and development costs low. The easiest way to do that is to add additional proven developed barrels. The whole industry is trying to grow volumes and keep costs down. Yet, all the low-cost oil has generally been discovered.


Q: Isn't Shell a somewhat separate case from the rest of the industry?


A: At Shell there is a much greater issue about management. That a problem of this magnitude could have been pushed aside for two years and not brought forward is unbelievable. The coverup is worse than the actual information.


Q: How do you view the stock?


A: Royal Dutch is now offering about a 4% yield, which will support it for a while. But investors will force the company to change its Anglo-Dutch approach and consolidate its two headquarters into a single location. That approach isn't working in managing the company, and it has to be costly to run organizations in two languages. There will be pressure on Shell to do a major streamlining and realignment. That won't play out for 18 months. In the end, it will probably end up a better company.


Q: Would you buy it here?


A: The yield supports it, but it is still not terrifically undervalued.

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