FT: Shell faces up to its angry investors

By Carola Hoyos

Published: February 4 2004

Sir Philip Watts (pictured), chairman of Royal Dutch/Shell, will on Thursday have to face up to one of the biggest tests of his 35-year career.

Nominally he will be presenting final results. But his real business will be explaining to angry investors why Europe's second-largest listed oil group overestimated its oil and natural gas reserves by 20 per cent.

Since the January 9 announcement, when Mr Watts was not available for comment, investors have been left to stew while nursing more than $15bn (£8.9bn) of paper losses on the shares.

Many of the company's largest shareholders have called for his resignation over the affair. But Sir Philip has told his employees that he would not bow to that demand.

Instead, analysts now want Sir Philip to announce changes in corporate governance. But they say that behind-the-scenes discussions over further changes will continue after Thursday.

The Association of British Insurers expects the process to be lengthy. "It will not stop with tomorrow's fourth-quarter results and reserves announcement," says Peter Montagnon, the ABI's head of investor affairs.

Expectations are for fourth-quarter net income of approximately $2bn, reflecting $1bn of charges from asset sales and closures.

Shell's reserves revelation brought to the fore shareholders' frustrations about its poor relative performance. According to JJ Traynor, analyst at Deutsche Bank, it is trading at an 18 per cent discount to BP, its closest rival in size, and a 40 per cent discount to ExxonMobil, the world's largest international oil group.

Shell has also lagged behind in replacing the oil and natural gas reserves it uses up each year while disappointing investors by its inability to increase its production.

It has already warned that it again failed to replace all of its used reserves in 2003 and analysts expect the group to raise its exploration and production spending.

The crux of the issue for many of Shell's largest shareholders is their curtailed power under the group's cumbersome dual structure, under which Royal Dutch, of the Netherlands, and Shell Transport and Trading, of the UK, effectively act as investment companies holding shares in Shell's operating companies.

Investors say that in order to change matters, they would need to increase their influence, especially on the Royal Dutch side, which controls 60 per cent of the entire group and therefore has the final say.

Royal Dutch has 1,500 priority shares, which are controlled by its management and supervisory board.

Pension funds and institutional investors are left with ordinary shares, which leave them with limited power to influence important decisions such as nominating managing directors and members of the supervisory board, and pushing through fundamental changes to the company's structure. Whether Sir Philip addresses these concerns today could decide not only the company's share price but also the amount of leeway investors give him in the next 17 months left to him before he reaches the group's mandatory retirement age.

In their campaign to oust Sir Philip, some top-10 shareholders have threatened not to support any important decision by the mistrusted chairman if he stays.

With the news last week that early retirement was not on the cards, some observers have suggested a gradual succession as a possible compromise.

Such a compromise will allow both Shell and Sir Philip to save face, and give investors the opportunity to start to build a better relationship with his designated replacement

Sir Philip's most likely successors are said to be Walter van de Vejver, Shell's head of exploration and production, or Malcolm Brinded, who leads the company's power and gas side.

But Mr van de Vejver has the edge, as he will give Thursday's key presentation on reserves.

Proving that he is a better communicator than his boss should not, as some investors have observed, prove too difficult.