Royal Dutch Shell Group .com

FINANCIAL TIMES: Shaken up by heavyweight Shell ( 26 Jan 05


By Tony Tassell and James Boxell


One of the big trading ideas circulating in the UK stock market is to buy Shell and sell BP. The trade has nothing to do with the relative fundamental value of the oil giants but everything to do with the impending shake-up of UK stock market indices that will be triggered by a restructuring at Royal Dutch/Shell.


The shake-up is expected to lead to a wave of buying by UK fund managers of Shell shares. Merril Lynch, the investment bank, estimates the purchases could top 22bn ($41bn). At the same time, fund managers are forecast to sell swathes of other stocks to raise funds.


Fund managers believe Shell-related trading could be the biggest technical adjustment to the market since Vodafone acquired its German mobile telecommunications competitor Mannesmann for about 100bn in 2000.


Jim Stride, managing director at AXA Investment Managers, said the market impact of the restructuring had been underestimated.


The Mannesmann deal compelled fund managers who track benchmark indices such as the FTSE 100 to buy Vodafone because of its increased size. At one stage, Vodafone accounted for almost 16 per cent of the FTSE 100 when it briefly became the world's fourth most valuable company.


This time, fund managers face similar buying pressure as the weighting of Shell in indices such as the FTSE 100 will rise when full market capitalisation of the oil giant is recognised in them for the first time.


Under the restructuring, introduced in the wake of the shareholder furore over the group's overstatement of oil reserves, a new UK-incorporated holding company Royal Dutch Shell will be created for the entire group. Shareholders are due to be vote on the changed in June.


This new holding company will replace the current dual-company structure under which Royal Dutch is listed in Amsterdam and Shell Transport and Trading is quoted in London. As a result, the shares in the new company representing the Royal Dutch equity will be included in UK indices for the first time. Similarly the Shell equity will reflected in the Amsterdam indices.


Merrill Lynch says the new group would take the number two place in the FTSE 100 index with its weighting in the benchmark expected to rise from 3.7 per cent to 8.7 per cent.


A similar impact is expected on Dutch markets. Currently, the weighting of Royal/Dutch is capped at 10 per cent of the blue-chip Aex index, but that limit will be raised to 15 per cent in March. Analysts expect the new Royal Dutch Shell to test those limits.


In the UK, the buying has already started. Since the restructuring was announced on October 28, Shell has outperformed BP by 7 per cent.


The broker says the top 50 UK fund managers now own 47 per cent of Shell compared with 39 per cent of the overall London market. If the fund managers do nothing after the restructuring, the percentage of Shell owned would fall to 18.21 per cent. To do nothing, however, is not an option given the tendency of UK fund portfolios to closely track indices to reduce the risk of relative underperformance, Merrill Lynch says.


In effect, fund managers are buying Shell shares regardless of what they believe is the fundamental worth of the company or the direction of oil prices.


It is even more a pure technical adjustment than the Vodafone/Mannesmann deal, which at least was driven by the acquisition of assets.


The re-weighting of Shell also will raise further concern about a concentration of the market. Already the oil sector comprises 15.2 per cent of the FTSE 100. Analysts expect this to rise to over 20 per cent after the deal.


Fund managers will be raising their bets on the oil sector at time when crude prices are near record highs. That may pay off in the near-term on technical buying.


But as Vodafone investors learnt after the telecoms stock fell sharply after its peak, the effect can be short-lived.

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