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The New York Times: Investors Have Mild Reaction to Regulators' Investigation of Royal Dutch/Shell



Published: March 9, 2004


LONDON, March 8 - Since an announcement in January that it had overstated its oil and natural gas reserves, Royal Dutch/Shell has puzzled and frustrated investors and analysts.


Shell, the third-largest oil company, has had little to say on who inside the company knew what and when about the events that led up to the restatement on Jan. 9, which knocked 20 percent off the company's stocks. But despite the many questions that still hang over the company, the stock market response has been muted.


Shares of Royal Dutch Petroleum, which owns 60 percent of Shell, have nearly recovered all the ground lost in the January sell-off. The shares, which trade on the New York Stock Exchange, are up 3.8 percent since Jan. 9, and rose 21 cents, to $50.44 in trading on Monday. In Amsterdam, Royal Dutch closed up 1.1 percent, to 40.79 euros. Shell Transport and Trading, which owns 40 percent of Shell, rose 0.9 percent on Monday, to 377.75 pence in London trading.


Such a mild reaction is somewhat surprising, given that investors in Britain and the Netherlands have become increasingly vocal over issues like executive pay and management appointments.


The eruption of Enron-like scandals - most prominently at Royal Ahold, the retailer, and Parmalat, the giant dairy company - has spurred calls by European shareholders for full and prompt disclosure.


But Shell has had little to say about why its top executive, Sir Philip Watts, and its head of exploration and production, Walter van de Vijver, were asked to resign on March 3.


Questions about the resignations have been referred to a committee of nonexecutive directors from the two component companies. That audit committee is not releasing information, on the advice of lawyers, said its chairman, Aad Jacobs, chairman of Royal Dutch's supervisory board.


L. Bruce Lanni, an analyst with A.G. Edwards in San Francisco, said: "The bottom line is there is a problem with the company, and the only way to address it is to get it out in the open, and attack it any way you can."


"It is in their best interest," Mr. Lanni said, "continue to try to find out how many ghosts are in the closet," and then expose them, he said.


Pressures for more information are certain to mount amid indications that the ousted chairman, Sir Philip, as well as some current executives, were all told of huge shortfalls in proven oil and natural gas reserves two years before it was publicly disclosed.


On Monday, The Wall Street Journal reported on a memorandum in early 2002 that warned of possible overstatements in the reserves.


If top executives knew earlier than they had previously disclosed that reserves were inflated, then Shell's public statements were misleading, said investors and legal experts.


"Shell's actions may have artificially inflated share price," said Louis Gargour, a senior portfolio manager with RAB Capital in London.


In its Jan. 9 announcement, Shell said it was cooperating with the Securities and Exchange Commission in the United States. Late last month, the company disclosed that the commission had begun a formal investigation, which gives the S.E.C. the power to subpoena documents and request that witnesses testify under oath.


Lawyers who specialize in European and United States securities regulation say the way the Shell investigation is handled will be closely watched for what it says about the approach the S.E.C. will take with European companies in the wake of a recent wave of accounting scandals.


When the commission first tried to toughen up securities rules for companies that were not based in the United States, but who trade on New York exchanges, many European regulators balked, saying that their own rules were strong enough.


The S.E.C. requires energy companies whose securities trade in the United States to record reserves when they think they can commercially extract the oil or gas.


If it becomes apparent that Shell knew more about the reserve overstatement than it has previously disclosed, Shell's two-company structure may come under renewed fire.


At meetings with analysts and investors last week, Shell's new chairman, Jeroen van der Veer, emphasized the long history of the corporate structure, saying that any fundamental changes would take some time.


Some investors say that he may be misguided in defending an unwieldy structure that has not served Shell very well in its current crisis.


"It is all very well to say this structure has worked for us for 100 years," said Eric Knight, managing director at Knight Vinke Asset Management in the Netherlands.


"Clearly, Shell is going through a major crisis of confidence," Mr. Knight said, "and this is when investors need to understand what is going on and how are decisions being made."

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