Bloomberg.com: Shell, After Reserve Cuts, May Post Drop in Quarterly Earnings

April 28 (Bloomberg) -- Royal Dutch/Shell Group, which faces regulator probes and investor lawsuits after cutting oil and gas reserves three times, will probably report a 16 percent drop in first-quarter profit as output declines.

Based in London and The Hague, Shell will probably say profit excluding one-time items fell to $3.3 billion from $3.91 billion a year ago, according to the average forecast of six analysts surveyed by Bloomberg News. Oil and gas output in the first quarter probably dropped by 5 percent in part because of asset sales, analysts at Citigroup Inc. said in a note.

Shell overstated proved reserves for more than five years, leading to a U.S. Securities and Exchange Commission investigation and the ouster of Chairman Philip Watts, 58, and oil and gas head Walter van de Vijver, 48. Shell this month published documents showing some former executives knew about inflated reserves almost two years before they were disclosed.

``When you buy into Shell it's a belief that there should be light at the end of the tunnel,'' said Neil McMahon, an analyst at Sanford C. Bernstein in London, in an interview.

BP Plc, Europe's largest oil company, on Tuesday reported a 14 percent rise in net income and said it plans to continue buying back shares after spending $1.25 billion on repurchases in the first three months of the year. BP plans to sell shares in petrochemicals operations with a book value of $7 billion.

Rising Oil Prices

The cut in Shell's reserves has raised concern of broader writedowns in the industry, and El Paso Corp. of the U.S. later disclosed its own reserve revisions. El Paso shares have dropped 20 percent since announcing the reduction Feb. 17. Shell reports first-quarter earnings at 7:30 a.m. London time on Thursday.

Shares of Shell Transport & Trading Co., which represents 40 percent of Royal Dutch/Shell Group, have lost 3.2 percent in London since the first cut in reserves on Jan. 9, compared with a 10 percent rise at BP. Tuesday, Shell shares gained 0.4 percent to 388.5 pence. BP slipped 0.7 percent to 491.5 pence.

Oil companies including Shell are benefiting from rising oil prices as OPEC restrains production. U.S. crude oil averaged $35.21 a barrel in the quarter, more than last year's average of $31, itself the highest annual average in two decades.

Shell Chairman Jeroen van der Veer, 56, has said he isn't ruling out resuming stock buybacks. Shell's London shares have a dividend yield of 4.05 percent, more than BP's 3.16 percent.

`Project Rockford'

The analysts surveyed forecast Shell's earnings excluding one-time items and on a current cost of supplies basis, which strips out changes in the value of inventories. Shell, which raised about $744 million by selling its sake in China Petroleum & Chemical Corp. in March, also reports net income.

Earnings at Shell, Europe's second-largest oil producer, have lagged consensus forecasts in four of the last five quarters, according to Bloomberg data. BP has met estimates in three of the last five quarters.

``People want to wait and see whether anything else crawls out of the woodwork,'' said Bruce Evers, an analyst at Investec Securities in London, which has a ``hold'' rating on Shell.

The Jan. 9 cut in reserves, the result of a review Shell termed ``project Rockford,'' increased concern about growth at Shell's oil and gas unit. Watts had lowered a target to boost oil and gas output in 2001 and Shell missed its target in 2003.

Since then the company has lowered its reserves estimates twice more. On April 19, Shell said it will restate financial statements and planned to amend its 2002 annual SEC filing. The impact of writeoffs and other issues will lower earnings by about $100 million a year from 2000 through 2003, Shell said.

Watts and Van de Vijver left the company last month in connection with the misstated reserves. Watts hasn't commented publicly since he left the company. Shell also replaced Chief Financial Officer Judith Boynton last week. More than 12 shareholder lawsuits have been filed.

Credit Ratings

Shell lost its top credit ranking April 21 from Moody's Investors Service, the third time its debt rating has been cut. The loss of the AAA rating means there's a greater chance of share buybacks, Citigroup analyst Jon Wright said in a note.

Moody's lowered its ratings for Shell's long-term debt one level to Aa1 from Aaa, the highest possible. Fitch Ratings lowered its rating on Shell's senior unsecured debt to AA+ from AAA earlier the same day, following a cut to AA+ from AAA by Standard & Poor's earlier that week.

Shell said April 19 that in the future outside experts will be involved in annual auditing of reserves. It also plans to accelerate a review of corporate governance.

Once the world's largest publicly traded oil company, Shell was leapfrogged with the Exxon Corp. takeover of Mobil Corp. in 1999. BP last year overtook Shell as Europe's largest oil producer after BP spent more than $7 billion in Russia on a venture with a local partner.

To contact the reporter on this story:

Alex Lawler in London alawler@bloomberg.net.

To contact the editor on this story:

Chris Collins at collinsc@bloomberg.net

http://quote.bloomberg.com/apps/news?pid=10000102&sid=a6gXkTaXsiQQ&refer=uk