San Jose Mercury News: Shell Reduces Earnings by $203 Million
Posted 29 May 2004
LONDON - Royal Dutch/Shell Group of Cos. reduced its 2003 earnings by $203 million Friday, in an annual report delayed by two months due to the scandal arising from the company's downgrading of its oil and gas reserves.
Yet even as it sought to restore its battered reputation, Shell suffered another blow when a U.S. refinery said it had supplied Shell gas stations in parts of Louisiana and Florida with gasoline that contained potentially damaging amounts of sulfur.
Shell's revised net income for 2003 was $12.50 billion compared to the original net income figure of $12.70 billion that it announced in February, before the full extent of its reserves problems emerged.
The company's restated earnings were 27 percent higher than the $9.72 billion in restated net income for 2002. Shell had earlier reported its 2002 net income as $9.42 billion.
Restated sales totaled $268.9 billion, up from $222.8 billion in restated sales for the previous year. By comparison, Shell's original sales figures in February were $269.1 billion for 2003 versus $222.9 billion for 2002. Shell also restated its results for 2001.
The catalyst for these embarrassing revisions was four separate reclassifications of its oil and gas reserves, the most recent of which Shell announced Monday. The Anglo-Dutch company first stunned shareholders in January when it downgraded 20 percent, or 3.9 billion barrels, of its reserves from "proven" to less certain categories. Three other downgrades followed, for a total reduction in reserves of 23 percent, or 4.47 billion barrels, from previously reported levels.
Reserves are an oil company's most valuable asset, and any reduction in their estimated size is a serious concern for investors.
In the confusion that followed, Shell dismissed several top executives and delayed by two months the release of its annual report. "Rebuilding credibility" and "regaining trust" are now the company's key priorities, it said in its annual report.
Shell sought in its annual report to reassure shareholders that its core businesses - exploration and production, and refining and marketing - are in good shape and that it is pursuing several new projects that augured well for the future.
"Shell remains a sound and profitable business, and I firmly believe that we have real strengths on which to grow our business, and rebuild our reputation," said its chairman, Jeroen van der Veer.
But in another setback, a refinery in Houston has asked the Shell gas stations that it supplies to stop selling regular and mid-grade gasoline that was shipped through the Port of Tampa or Broward County's Port Everglades. Motiva Enterprises said the fuel might contain too much sulfur, which wouldn't affect engine performance but could cause faulty gas gauge readings.
The news came ahead of the Memorial Day weekend, which marks the traditional start of the peak summer driving season in the United States.
Shell said that none of the senior executives ousted after the furor over oil reserves would receive annual bonuses for 2003.
The company's annual report showed that former chairman Sir Philip Watts received his annual salary of 865,000 pounds ($1.56 million) last year. But the Shell remuneration committee decided Watts should miss out on an annual bonus - typically worth the same as his yearly pay. It also said he was not entitled to 50 percent of stock options granted in 2001 as the company had not met performance targets.
Shell's failure to outperform rivals such as BP and ChevronTexaco also meant that Watt missed out on shares worth 1.7 million pounds ($3.06 million) under the group's incentive plan.
The reduction in Shell's reserves led to the resignations of Watts, head of exploration and production Walter van de Vijver, and finance chief Judith Boynton.
Shell published an external investigator's report last month which revealed dishonesty at the highest levels of the company and showed that some bosses knew for almost two years the company had publicly overstated its reserves.
The company has said it is continuing negotiations with the Securities and Exchange Commission, which has been investigating its restatements. It is also being pursued by European regulators and may face lawsuits from investors.
Friday's annual reports showed that Van de Vijver was paid 842,000 pounds ($1.52 million) last year, but he received no bonus for his work in 2003. Boynton was paid her annual salary of 382,000 pounds ($687,600).
The annual reports did not carry details of possible severance payments to the ousted executives. A company spokesman said talks with the individuals are continuing.
Shell also said that none of the current management team, including new chairman Jeroen van der Veer, will receive annual bonuses for 2003.
Shares in Shell Transport & Trading PLC, the group's British arm, fell 1.1 percent to close at 394.25 pence ($7.10) on the London Stock Exchange on Friday.
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