The Times: Shell share buyback looks slick move

30 April 04

SHELL’S vanishing oil reserves did not amount to a death sentence for the company. It was still left with an awful lot of oil and gas at a time when prices for both are strong. But the rapturous reception that greeted the buoyant profit figures that the company announced yesterday, accompanied by an ingratiating $2 billion share buyback, showed the City at its most forgiving.

After what has emerged from the company so far, it is too early for investors to be sanguine once more about Shell. A culture that allowed shareholders to be deliberately misled over such a long period is not likely to have been eradicated with a couple of high-profile departures and one demotion. And, although Shell’s production for the first quarter was impressive, it remains a worrying fact that the company’s lack of new discoveries means that it is shrinking with every gallon of petrol it sells.

It will have to increase its investment in exploration as it tries to replenish reserves but, at this stage, the money that it is allocating for additional exploration is little more than a splash in the ocean.

There is also the prospect of protracted and expensive litigation for years ahead, as those who feel that they have suffered as a result of the conscious inflating of the reserves, or would, in any case, like any compensation that might be available, pursue the company and its former directors, led by ousted chairman Sir Philip Watts.

The share buyback announced yesterday was a slick way of winning back some standing in the City. Institutional investors love to be given their own cash back, even if many of them will feel obliged to find new energy investments in which to put it because of their sector allocation policies. But Shell’s calculations of what it can afford to spend on buybacks may have been enhanced by the current strong energy prices. It might also be factoring in the possibility of more asset sales.

Cautious investors have reason to be wary for a while.

http://business.timesonline.co.uk/article/0,,8210-1092747,00.html