The New York Times: Shell Says Net Income Fell 19%, and It Offers a Bleak Forecast

By HEATHER TIMMONS

February 6, 2004

LONDON, Feb. 5 - Royal Dutch/Shell reported disappointing year-end results and production forecasts on Thursday while its embattled chairman and chief executive, Sir Philip Watts, said he intended to stay on.

Shell has been on the defensive since it said on Jan. 9 that its proven reserves were 20 percent less than previously reported. The discrepancy has led investors to look more closely at the company's two-headed capital structure, and the company said on Thursday that it would be willing to re-examine its foundation.

But analysts said that willingness, coupled with the weak results and production outlook, comes a bit late.

"Perception has gone through a seismic shift," said Ivor Pether, head of portfolio construction at Royal London Asset Management.

Shell, he added, was once seen as "ultraconservative, but very high quality, with lots of good projects out there."

Shell said that fourth-quarter net income fell 19 percent from a year earlier, to $1.88 billion, because of the costs of shutting refineries and because of write-downs. Analysts had expected $2 billion in net income for the quarter. For the full year, net income was up 35 percent, to $12.69 billion.

Sir Philip, who is scheduled to retire in June 2005, said in a conference call with reporters that he was determined to stay on and address the company's problems and that he had the wholehearted support of the board. He also said that he would be speaking with investors in coming weeks, and that he was open to changing the structure.

Shell's predictions on its future oil and gas production were also disappointing. Production is expected to be flat in 2004, then fall in 2005, Shell said, rather than growing 3 percent a year as predicted at the beginning of 2003.

"At some point, we'll start worrying about them not having enough oil to produce in the future," Mr. Pether said. "They need to boost reserves relative to production by 25 percent."

Still more negative news could come from the company's refining division. Shell acquired more refining assets when it bought Texaco out of a joint venture in 2001, but has suffered since because crude oil supplies in the United States are dropping.

The company is planning more sales of the refineries it gained at that time.

"If we don't crack refining, we won't meet our performance targets," Sir Philip said in a meeting Thursday afternoon with investors and analysts, alluding to making the company's refining profitable.

Shell's numbers looked even weaker relative to the industry's recent performance.

In a report on the results titled " Shell Transport and Trading: There are ways to sleep easier," Merrill Lynch analysts wrote, "Over all, a very disappointing set of results, particularly given that Exxon Mobil and ChevronTexaco last week beat the market consensus by 15 percent and 8 percent, respectively."

The stock of the two public companies that make up Royal Dutch/Shell fell only slightly on the news, analysts said, because they had already fallen sharply last month after the announcement of lower reserves. Shares of Royal Dutch Petroleum were down 1.32 percent, to 37.50 euros, in Amsterdam. Shares of Shell Transport and Trading fell 1.92 percent on the London exchange to close at 358.50 pence.

The Merrill report warned, however, that all the bad news might not yet be priced into Shell's stock. The valuation, the report said, is still not compelling, particularly when Shell's peers like BP and Total are better positioned to benefit from the current economy, and more likely to grow.

http://www.nytimes.com/2004/02/06/business/worldbusiness/06shell.html?pagewanted=print&position=