Financial Times: Lex: House trained but not off the leash: Royal Dutch Shell: “Yesterday's slight increase in Shell's share price, however, probably reflected relief that this quarter's disasters were natural rather than man-made.”: Friday October 28 2005

Royal Dutch Shell has been confined to the doghouse for so long, even a hurricane can seem like a breath of fresh air. Shell has weathered the recent tropical storms better than most had expected. Third-quarter profits beat forecasts. Yesterday's slight increase in Shell's share price, however, probably reflected relief that this quarter's disasters were natural rather than man-made. In the past year, Shell has restored some trust on corporate governance, but less on project execution. The latter is critical for those who regard Shell as oversold.

On paper, the potential is there. CSFB estimates that rebooking the reserves "lost" in 2004 and additions from the fast-growing liquefied natural gas business should add 5.8bn barrels of oil equivalent over the next five years.

The group received a boost on both counts when Tokyo Gas agreed to take 12 per cent of production from the Gorgon LNG project in Australia. Exploration success of 72 per cent so far this year bodes well for a pick-up in production from 2007.

Shell's 18 per cent discount to BP on 2006 enterprise cash flow multiples looks overdone - although the need for patience and faith precludes closing the gap entirely. On some estimates, Shell offers the best enterprise free cash flow yield in the sector right now. But that is off the back of flat near-term production and remains subject to big swings in capital expenditure. In light of that, it may say more about the whole industry's difficulties in maintaining momentum than anything else. 

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