THE NEW YORK TIMES: Shell Warns of New Cuts in Reserves of Oil and Gas: “The Royal Dutch/Shell Group warned Thursday that additional reductions in its proven reserves were possible, saying that about 900 million barrels of oil and gas, or about 6 percent of the total, were under review and could be reclassified” (ShellNews.net)
A Shell refinery in the Netherlands. On Thursday, Shell reported a 70 percent increase in net profit in the third quarter, to $5.4 billion, helped by record high oil prices. It is still reviewing its total reserves.
By HEATHER TIMMONS
Published: October 29, 2004
LONDON, Oct. 28 - The Royal Dutch/Shell Group warned Thursday that additional reductions in its proven reserves were possible, saying that about 900 million barrels of oil and gas, or about 6 percent of the total, were under review and could be reclassified.
The warning came during its earnings report and on a day when Shell said it would merge the two publicly traded entities that make up the company, unifying the boards and management. The merger would end a complicated structure that was nearly 100 years old and that some felt had dulled the lines of accountability and contributed to Shell's problems.
The consolidation was the result of investor criticism that began in January when Shell first slashed its proven reserve estimates by 20 percent, or 3.9 billion barrels. Executives also warned that they had not finished their review and that more reductions could occur.
Investors were surprised by the warning; six months ago, Shell said it had completed a thorough review of its reserves.
The new company, Royal Dutch Shell, will be based in The Hague; its shares will trade in London and Amsterdam, and in New York as American depository receipts.
Jeroen van der Veer, the head of Shell's committee of managing directors, will become chief executive. The company has also started an external search for a new chairman.
Shell reported a 70 percent increase in net profit in the third quarter, to $5.4 billion, helped by record high oil prices. Capital expenditure for 2004 will be $14 billion, not $15 billion as previously announced, executives said, because of delays in some projects, including one in the East China Sea.
Executives emphasized the structural changes on Thursday, but were quick to point out the reserve changes in a news conference.
"We have been listening hard to what people had to say," said Lord Oxburgh, chairman of Shell Transport and Trading, speaking about the corporate changes. The boards of Shell Transport and Trading and Royal Dutch Petroleum voted unanimously to combine the companies, he said.
Malcolm Brinded, Shell's head of exploration and production, said the potential reserve changes were "clearly a disappointment." Proven reserves are considered an oil and gas company's most valuable asset.
Mr. Brinded would not elaborate on which fields were affected, but said the changes came after the company had decided to review its exploration and production business on a well-by-well basis, rather than field by field. Shell said it had reviewed eight billion barrels of its reserves, or about 56 percent, under the new process.
The announcement is yet another disappointment from the company, which has reduced its proven reserve levels four times this year, and increased speculation that it may be forced to do a large, transformational acquisition to bolster its exploration and production division.
When asked about the possibility of such a deal, Mr. van der Veer did not completely rule it out, saying the company had to think about what would enhance shareholder value in the long term. He said Shell's philosophy was to create that value by maximizing returns.
Investors were critical of Thursday's reserve announcement, but enthusiastic about the structural change.
The review of another 900 million barrels of reserves was "another sign that this company needs to be run with a much firmer hand than it has been over the past five years," said Chris Wheaton, an energy analyst with Morley Fund Management, which owns shares in both Shell Transport and Trading and Royal Dutch Petroleum.
Analysts were divided in their feelings about the company's announcements, with some praising Shell's governance changes, and others highlighting its reserve problems. A Deutsche Bank analyst, JJ Traynor, upgraded his rating on the company from hold to buy, noting the strong results and the "positive outcome" from the structural review.
Merrill Lynch, in contrast, lowered its ratings from buy to neutral.
"We would have called the shares sharply lower this morning on the reserves news had it not been for the announcement of unification of the two holding companies into a single entity," Mark Iannotti, a Merrill Lynch analyst, said in a note. Reviewing another 900 million barrels of oil and gas represents a "further major downgrade to booked reserves," Mr. Iannotti said.
Shell Transport and Trading shares closed up 2.8 percent on the London Stock Exchange. Shares of Royal Dutch Petroleum closed up 1.2 percent on the Amsterdam exchange.
The reorganization is expected to be completed by May. Royal Dutch shareholders will receive two Class A shares for every share they own, and Shell Transport and Trading shareholders will receive 0.2874 Class B shares in the new company. Both will have the same voting rights, and pay the same dividends. Previously, Royal Dutch shareholders had more voting privileges, and were paid 50 percent higher dividends.