Royal Dutch Shell Group .com

Globe& AGMs likely to focus on gushing cash, new reserves policy



Monday, April 26, 2004 - Page B2


It's "truth or dare" time again in the oil patch.


As annual meeting season goes into full swing this week, with Petro-Canada, EnCana, Shell Canada and Suncor hosting company faithful and skeptics alike, this year's themes are expected to differ from those of 12 months ago.


Last year, with the Sarbanes-Oxley Act newly enacted in the United States, question periods at annual general meetings, or AGMs, addressed issues such as the impact of the act on Canadian companies -- especially those with listings on U.S. stock exchanges; board independence; appointment of auditors and the expensing of stock options. There was also a significant amount of time spent addressing the apparent disconnect between commodity prices, oil patch cash flows and market valuations.


This year it's going to be different. Corporate governance isn't the same hot-button issue, energy stocks have been on a tear and a number of companies have begun expensing stock options.


Some year-over-year constants include the increasing difficulty of replacing reserves from the declining Western Canadian sedimentary basin on a cost-effective basis, the gravity-defying act of oil prices and the persistent speculation about which company will be next to hang out the "for sale" sign or morph into a royalty trust.


But the biggest change since last year is the new oil and gas reserve reporting requirements put in place by the Alberta Securities Commission last September.


These new guidelines, National Instrument 51-101, which have been adopted across Canada, have taken on even greater importance in light of the troubles facing Royal Dutch/Shell Group over allegations it overstated reserves. The Anglo-Dutch company subsequently slashed its number for proven reserves by 20 per cent.


Where it gets interesting is this: Royal Dutch is the world's second largest oil and gas company and was supposedly in compliance with reserve reporting requirements outlined by the U.S. Securities and Exchange Commission.


Under NI 51-101, Canadian oil and gas companies that are listed on stock exchanges in the United States and comply with SEC guidelines, or produce 100,000 barrels of oil equivalent a day are eligible for an exemption from the requirement that 75 per cent of the reserves be evaluated by an independent third party.


A number of companies meeting either criterion have opted for the exemption. But the Royal Dutch case has industry types questioning whether allowing the big players to avoid such scrutiny is the right thing to do. Because Shell Canada's chief executive officer, Linda Cook -- who last year transferred to Canada from Royal Dutch -- was a member of the parent company's exploration and production executive committee, she could be asked to answer a few of those questions at Shell's annual meeting later this week.


If governance issues do arise at oil patch meetings in the coming weeks, it's a sure bet the questions will concern reserve valuation and be directed at the independent board committees that oversee the process.


That aside, the talk will also be about money; the scads of cash accruing to companies' bottom lines as a result of commodity prices that refuse to come down from their lofty heights.


In the first quarter of this year, oil prices averaged $35.25 (U.S.) a barrel, while natural gas was $ 6.40 (Canadian) a thousand cubic feet. While those numbers are lower than those of last year's first quarter, they exceed prices in the final quarter of 2003.


At this time last year, share prices for oil and gas companies had yet to reflect the high commodity prices. That prompted a number of companies to buy back their shares.


But that's not the case today. The Toronto Stock Exchange's energy subindex climbed 43 per cent in the past 12 months, rendering the possibility of continued buybacks unlikely.


If buying back stock isn't on energy companies' list of what to do with the money inflow, other options include boosting dividends and declaring special dividends, paying down debt or simply increasing capital expenditures -- because as it stands now, most companies aren't even spending their cash flow.


But there's a problem with simply boosting capital spending, especially as the industry heads into spring breakup, when softer ground makes certain areas inaccessible to heavy equipment.


"At this point, the industry has tapped out the capacity in terms of people, equipment and seasonality," notes Wilf Gobert, vice chairman of Calgary-based investment dealer Peters & Co. Ltd.


That leaves the option of making acquisitions in order to boost reserves and production; but with the royalty trusts continuing to pay high prices for assets that are for sale, it's harder for conventional exploration and production companies to make the numbers work.


Finally, there are companies whose stock prices have been running up -- such as Zargon and Cequel -- where management will be fielding questions as to whether they are about to take the royalty trust route. Other companies, such as Penn West, which have announced they are looking at options, have yet to set meeting dates.


All this will make for an interesting few weeks in the oil patch as companies address the year that was and look ahead to the rest of 2004.


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