SUNDAY HERALD (UK): Shell pins hopes on profit surge to restore image: “Shell’s image has been tarnished in recent months with hefty fines following regulatory inquiries into its estimates of oil and gas reserves. There are also uncertainties over the proposed Royal Dutch merger.”: “And like Humpty Dumpty, it could be heading for a great fall unless it gets it right on February 3.” (ShellNews.net) 30 Jan 05
By John Phelps
Oil giant Shell will attempt to close a yawning credibility gap on Thursday, when group chief executive Jeroen van der Veer is due to announce a dramatic surge in profitability as a result of sharply higher petroleum prices.
Shell’s image has been tarnished in recent months with hefty fines following regulatory inquiries into its estimates of oil and gas reserves. There are also uncertainties over the proposed Royal Dutch merger.
“The company is due to become the Humpty Dumpty of the stock market after its merger with Royal Dutch,” commented ING analyst Angus McPhail. “And like Humpty Dumpty, it could be heading for a great fall unless it gets it right on February 3.”
At the heart of his concern is the question of asset valuations in the wake of last year’s write down of 4.47 billion barrels of reserves. Most observers expect a further cut of around 900 million barrels, and possibly more.
“The amount may not be that significant, but we need to see a line drawn under this sorry affair,” commented another stockbroker. “We also want more details of the tax implications of its merger proposals.”
Van der Veer had previously admitted the scale of the problems at the company in a speech in December when he said his “head is on the block” unless Shell’s management got to grips with the reserves issue.
The comments were made by the chief executive in a private speech to 100 Shell executives in the Hague, which was leaked to the Financial Times.
Van der Veer also claimed that the position of exploration director Malcolm Brinded was under threat over the issues. Brinded is a well-known figure to those involved in the North Sea oil scene.
Concerns are likely to overshadow actual results, although brokers believe fourth-quarter earnings may have doubled to around $5.15 billion (£2.73bn) and full-year profits could be up from $12.7bn (£6.73bn) to as much as $17.6bn (£9.3bn), despite a fall in volumes.
Analysts say the recent out-performance of Shell shares has been caused by institutional buying ahead of the proposed merger with Royal Dutch. This is due to be approved in June when tracker funds will have to raise their holdings to reflect the increased size of the business.
Merrill Lynch has estimated that the top 50 UK fund managers now own 47% of the company, compared with an average holding of 39% in other FTSE stocks.
The leading broker reckons that total purchases in the run up to the merger could top £22bn, meaning that the shares have out-performed those of BP which is believed to have far better medium- term profit prospects.
Analysts have dubbed the Shell/Royal Dutch combine the “fat boy” of the market place as it will rank as the UK’s second biggest quoted company.
Once the merger takes place, Shell will see its proportion of the Financial Times Stock Exchange(FTSE) 100 share index rise from 3.7% to 6.7%.
Market experts point out that similar buying took place following the Vodafone/Mannesman merger in 2000. The combined group was valued at more than £100bn at one time as institutions were forced to buy shares to ensure they had the right weighting in the FTSE index.
Vodafone later fell back and its shares were valued at around £74bn last year, before recovering to a current valuation of around £90bn.
Analysts fear that something similar could happen to Shell unless its directors can reverse its asset erosion with some good news in the coming months.
The company is also reportedly seeking to introduce strict guidelines to boost accountability in its exploration and production business.
The new single lines of accountability within the exploration and production division are part of wider moves to lift the company’s production and restore its proved reserves.
Shell was also planning to hire more than 1000 engineers for its exploration and production division to help tackle the reserves problem.
Three former top executives at the company left their jobs over the reserves debacle. It emerged earlier this month that Judy Boynton, who was asked to step aside as financial director in April, will take away more than £1.5m in cash, shares and pension entitlement. In addition Boynton, who left by mutual agreement on December 31, also has a potential £200,000 profit on unexercised share options.
Boynton’s move came about a month after the departure of Sir Philip Watts, chairman and Walter van de Vijver, the then head of exploration and production in April 2004. Watts took a severance payment of £1m and van de Vijver received €3.8m (£2.63m).