THE WALL STREET JOURNAL: Royal Dutch and Shell Agree To Merge Holding Companies: “Royal Dutch/Shell Group said it will consolidate its Dutch and British parents under a single board and a U.S.-style chief executive, in a sweeping restructuring meant to right the oil giant following this year's energy-accounting scandal, even as it said it may have to further cut its tally of its reported energy reserves.” (ShellNews.net)

By CHIP CUMMINS

Staff Reporter of THE WALL STREET JOURNAL

October 28, 2004

LONDON -- Royal Dutch/Shell Group said it will consolidate its Dutch and British parents under a single board and a U.S.-style chief executive, in a sweeping restructuring meant to right the oil giant following this year's energy-accounting scandal, even as it said it may have to further cut its tally of its reported energy reserves.

The planned merger calls for Royal Dutch Petroleum Co. of The Hague, Netherlands, to exchange all of its outstanding stock for shares in a new entity to be called Royal Dutch Petroleum PLC, headquartered in The Hague. At the same time, Royal Dutch will acquire its sister company, London-based Shell Transport & Trading Co., and distribute shares in the new entity to its investors.

The move marks the company's most dramatic restructuring since Royal Dutch and Shell combined forces in 1907 in a complex joint-ownership arrangement that has remained largely intact since.

The restructuring is also a stunning reversal for Shell , which resisted for months calls for dramatic corporate change following its admission in January that it massively inflated its tally of oil and natural-gas reserves, the estimate of energy a company has in the ground and a key investor metric.

But it is unclear how effective the changes will be in finally putting the accounting scandal behind the company. Especially troubling was that Shell said Thursday it may have to slice off another 900 million barrels of oil equivalent, or 6%, from its reserves tally. This came after previous assurances it had finished cleaning up its reserves accounts.

Shell also indicated it wouldn't be making any more big changes to the executive suite, following the ouster of two top officials earlier in the year and the demotion of at least two others. An internal investigation into the overbooking largely blamed former chairman Sir Philip Watts and a top deputy for not adequately disclosing massive reserve overstatements. Both men have said they acted appropriately.

But Jeroen van der Veer, who took up with immediate effect the newly created position of chief executive, and Aad Jacobs, slated to become the new company's independent chairman, also received warnings about reserve issues ahead of the company's disclosure, raising questions about their roles in the scandal. Both men have said they acted appropriately.

Shell said Thursday it has conducted new audits of some eight billion barrels of its 14.35 billion barrels of reserves reported as of Dec. 31, 2003 and those audits suggest it may have to make further cuts. Such a move would be the company's fifth reserve downgrade since January.

Shell didn't disclose specifics, throwing into doubt other key investor measures based on the reserve estimate, such as its reserve-replacement ratio, or the rate at which an oil company replaces energy depleted by production with new finds. The move could also affect the company's financial statements, and Shell said details won't be available until early next year.

"I am of course disappointed that the more rigorous review and audit process we have put in place has identified potential proved reserves reductions," Mr. van der Veer said in a statement.

Investors, however, largely applauded the restructuring plans early Thursday, boosting share in Shell 's parent companies. In Amsterdam, Royal Dutch was up €1.53, or 3.6%, at €43.82 ($55.68). In London, Shell T&T was up 23 pence, or 5.4%, at £4.47 ($8.17 or €6.43). Some of the buying appeared tied to the expected increased weighting of the combined company on London's widely tracked FTSE-100 index.

The merger won't be completed until next year and depends on shareholder and regulatory approval. If it goes ahead, current shareholders would receive new shares reflecting the 60%-40% split in ownership of the group by Royal Dutch and Shell T&T.

Royal Dutch shareholders would receive two shares of the new entity for each share they currently hold. Shell T&T holders would receive 0.2874 new shares for each currently held share. Shares will be issued in two classes, but have equal voting rights.

Shell also said Thursday earnings for the third quarter more than doubled from a year ago, boosted by higher oil prices and a strong performance from its refining business.

Shell said net income was $5.4 billion, up 120% from $2.45 billion in the third quarter of last year. Revenue was $71 billion, up 44% from $49.45 billion in the year-ago period. The profit corresponded to earnings per share of €1.31 for Royal Dutch shares, up from 64 European cents a year ago. Shell T&T shares earned 12.5 pence, up from 6.4 pence in the third quarter of 2003.

Write to Chip Cummins at chip.cummins@wsj.com