Daily Mail: Shell's £13bn credibility gap
27 April 2004
Posted 28 April
ROM the relentless tide of bad news at Shell, you might think its business was falling apart. In fact, first-quarter profits on Thursday should easily top £2bn - probably keeping it ahead of BP, which reports today.
For all its problems, Shell is still a major force. Though BP is set to overtake it in oil production this year - both are pumping out about four billion barrels - Shell makes just as much money.
Yet BP, thanks to a big share rerating since February, is valued at £107bn. Shell and Royal Dutch add up to £94bn - trailing by £13bn.
Shell's top tier is complex and complacent. But is it worth minus £13bn? Not quite.
Some of the value gap is down to the lawsuits Shell faces. Putting a price tag on them is difficult. But this is not Enron, where the shares collapsed. Shell shares were 401 1/2p on 9 January, when it dropped its reserves bomb. They are 387p now. The group's market value has dropped by £3.5bn.
The fall over 90 days, used by US courts as a benchmark, was £8bn.
But can every investor claim compensation? It is doubtful. Those who can prove they bought on the basis of exaggerated reserve claims may have a stronger case.
The US tendency to award massive damages is undisputed. But a $1 rise in crude oil adds $1bn to Shell's cash flow. Crude is up $10 in a year. So if Shell can cap its legal liabilities at $10bn, that would wipe out only 12 months' gains.
Such hopes have encouraged a bounce in the shares from below 350p in February. Optimists see Shell emerging leaner and fitter from its traumas.
The trouble is that the reserves scramble is only a symptom of the problem - that it is not finding enough oil. BP is growing far faster. At the least, Shell may need to increase exploration spending sharply.
The other worry is its management structure with all its tiers overlapping and overhanging like a soggy wedding cake. Rather than reinforcing collective responsibility, it seems to have given people room to duck and dive.
Some of Shell's survivors are hanging on to it, as Moscow apparatchiks clung on before the Soviet empire collapsed. But they are on a collision course with big investors.
One warned last night: 'Tweaking is not enough. We need a single board with clear accountability.'
To get their message through to the core, investors now need to pierce an outer ring of lawyers, PR advisers and camp followers, all with their taxi meters in overdrive.
These in turn are encircled by a besieging army of regulators and litigators. It will not be easy for Shell to focus on restoring its exploration business. It can hardly complain that its shares trade at a discount.