Royal Dutch Shell Group .com A Royal Dutch Mess


March 19, 2004


If you think flip-flops are just footwear for the seaside, then you have to read the latest oil reserve press release from Royal Dutch/Shell, represented by two stocks, Royal Dutch (NYSE: RD) and Shell Transport (NYSE: SC).


Thursday's flop


In January, Shell reduced its proved reserves by 3.9 billion barrels, or roughly 20%. In February, the company "disclosed" where adjustments were being made. Yesterday, the company removed another 250 million barrels of oil equivalent from its 2002 year-end proved reserves -- raising the total reduction to a mind boggling 4.15 billion barrels.


So, after the latest flip-flop, what does the company say? "All reserves and financial figures included in this release should be regarded as preliminary." So, before the annual report is published (late) in May and the shareholder meeting is held (also late) on June 28, the door is open for reserves to be re-re-categorized.


These many gyrations are making alternatives ranging from giant ChevronTexaco (NYSE: CVX) to smaller Stone Energy (NYSE: SGY) look good -- heck, at least their reserves aren't in flux. Shell, on the other hand, gets its name associated with the likes of Forest Oil (NYSE: FST), which recently reported massive reserve reductions, too.


Executive flip


A precursor to today's bad news was the ousting on March 3 of CEO Sir Philip Watts and Walter van de Vijver, chief executive of Shell Exploration and Production. It is amusing that troubled U.S. natural gas and pipeline operator El Paso (NYSE: EP) opted to replace the same two positions in order to get on with its business. Maybe amusing is the wrong word.


Legal flop


Might there be sharks swimming along Shell's seashore? Look to the press release: "Shell is also subject to related ongoing legal actions in the U.S. As a result, Shell's management must balance its public statements on this subject against the risk of prejudice in any subsequent legal action." This sounds like, "We would love to be candid but, given our predicament, we are better off saying what we know, not what we think." Leave it to Shell to make lawyers look good.


The big picture

It would appear that Shell has failed to replace 100% of its production for the past three years. Interestingly, the impact of that combined with reserve reclassifications does not appear to have shaken investors. In fact, despite trading for a relatively modest 12 times earnings, Royal Dutch is up 17% over the last 52 weeks.


By comparison, ExxonMobil (NYSE: XOM), free of reserve reclassifications and with 10 straight years of production replacement, trades for 13 times earnings and is up just 19%. If I were a Shell shareholder, I might just flip my Shell and flop into Exxon.


Interested in discussing oil or Royal Dutch/Shell with other investors? Try The Motley Fool's Oil & Gas or Royal Dutch discussion boards.


Fool contributor W.D. Crotty dislikes the sound of flip-flops banging against people's heels. Yuck! He does like and own ExxonMobil and ChevronTexaco. It must be something about those tied-together names.


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