THE BUSINESS (EU): Shell rethink expected to boost shares: “…a cold snap in the US and uncertainty in Iraq have conspired to keep the price of a barrel of oil around the $50 level and provided support for Shell. Old takeover stories have also been regurgitated with perennial favourite Total of France mooted to be considering a cash offer.” (ShellNews.net) 30/31 Jan 05
ANGLO-Dutch oil giant Royal Dutch Shell is in a happier state than a year ago when reserves downgrades undermined investors' confidence and led to growing demands to change the company's dual board structure. Promises of such change this year are thawing analysts' frosty perceptions.
Ahead of fourth-quarter results on Tuesday, shares in the £44.3bn company have topped 460p, their highest levels since 2002 as buyers hope Shell approaches the beginning of the end of its problems.
Tuesday's figures could well contain another hefty downgrade of up to 500m barrels in Shell's proven reserves on top of last year's 4.5bn barrel downgrade. But a cold snap in the US and uncertainty in Iraq have conspired to keep the price of a barrel of oil around the $50 level and provided support for Shell.
Old takeover stories have also been regurgitated with perennial favourite Total of France mooted to be considering a cash offer.
One of the major reasons for Shell's rise is technical rather than operational ahead of the proposed restructure of the company. Later this year the UK and Dutch operations will be merged and some predict it will have a major effect on the UK stock market.
Merrill Lynch predicts the shake-up will prompt UK fund managers into heavy buying. It believes fund managers who follow a benchmark index could be forced to buy up to £22bn of Shell shares as its weighting in the UK market soars with the creation of the combined Royal Dutch Shell. Merrill reckons fund managers own 47% of SheE but this would fall to 18.2% after the restructuring, forcing a rash of buying by index trackers.
This month, Morgan Stanley upgraded its recommendation from equal weight to overweight and downgraded rival BP to equal weight, raising its price target for Shell to 500p.
The broker expects Shell to continue its disposal programme this year and thinks the management's target of $10bn (£5.3bn) to $12bn from disposals between 2004 and 2006 underestimates how much it could realise.'It expects disposal proceeds to be more like $18bn with $8bn this year. This could trigger a share buyback of up to $6bn.
Gerrard is more cautious with a neutral rating on the oil giant although it recognises the potential increase in demand the restructure will prompt. It said: "From a fundamental perspective we continue to remain cautious on the stock. We continue to believe Shell has an unattractive growth profile compared with the industry average.
"Production growth is expected to be flat until 2006 and then grow only very modestly to 2009. Shell continues to have among the lowest reserve/replacement ratio and highest finding/development costs of its peer group. Shell's free cashflow generation remains weak as a result of higher required capex and limits the scope for share buybacks."