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The New York Times: Credit Agency Lowers Its Outlook on Shell



Published: March 13, 2004


Fitch Ratings lowered its outlook yesterday for the credit rating of the Royal Dutch/Shell Group, the latest fallout from the company's decision to reduce the estimates of its proven oil and gas reserves.


Fitch revised its outlook on Shell's AAA rating to negative from stable. The move, which typically precedes a cut in the rating itself, comes after similar steps by Standard & Poor's and Moody's Investors Service. In its announcement, Fitch said that Shell might be forced to pay as much as $6 billion to replace the proven reserves it wrote down. The negative outlook also reflects the possibility of "further managerial instability and movement, financial penalties, findings supporting shareholder litigation and further reserve adjustments."


Since January, when Shell lowered its proven reserves by 20 percent, or 3.9 billion barrels, two of the company's top executives have resigned and the Securities and Exchange Commission has started an investigation into whether the company accounted for its reserves improperly. Proven reserves are oil and gas resources that are reasonably certain to be produced.


To maintain its production, Shell may be forced to spend about $2 a barrel to replace the oil it previously said was proven, either on its own or by buying reserves from other companies. These costs "would materially reduce the financial flexibility of the business and its capacity to control its debt levels."


Despite the outlook for Shell's debt rating, the company's balance sheet is relatively sound. Shell's debt ratio - debt divided by its assets - was 20.9 percent at the end of 2003, 2.7 percentage points lower than the previous year. The company said it added $2.8 billion in long-term obligations but also held $2 billion in cash.


Though the company may incur extra costs related to the cut in its reserves, Shell is still in a strong position financially because oil prices are comparatively high.


"They can downgrade all they want," said Fadel Gheit, who covers Shell for Oppenheimer & Company, referring to credit agencies, "but at the end of the day, they are still generating cash while oil is at $35 a barrel."


The biggest risk, analysts said, was that turmoil in the company could lead more executives to resign and that crucial decisions could be delayed.

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