The Business: Broker fears dividend may be a problem “THERE is a sense of nervous expectation ahead of Royal Dutch Shell's interim results following the reserves debacle”

25 July 04

THERE is a sense of nervous expectation ahead of Royal Dutch Shell's interim results following the reserves debacle, which led to former chairman Sir Philip Watts being ousted earlier this year.

Goldman Sachs' Matthew Lanstone has maintained an "in line" rating for Europe's second-largest oil company. While attention has focused on corporate governance and the Anglo-Dutch company's unwieldy dual board structure, Lanstone's main concern is the dividend. He said: "Maintaining a local currency real dividend growth policy increasingly looks a stretch for Royal Dutch Shell. On our estimates the dividend payout ratio will rise to 80% for Shell... in 2006."

Referring to the last annual meeting on 28 June, Lanstone said: "We noted a reduction in conviction on the question of the dividend at the AGM and would not be surprised to see Shell follow BP in switching to a dollar denominated dividend."

Lanstone is also concerned about Shell's continuing Sakhalin 2 project, an oil and gas pipeline for extracting natural gases on Sakhalin, a Russian island in the Pacific Ocean. He noted that environmental issues, such as fishing rights and grey whale migration, have already produced a 20% cost overrun and "these challenges may be underestimated by the market".

Morgan Stanley echoes Goldman's stock expectations. It rates Shell Transport, the group's UK-listing, as "equal-weight" and expects the stock to "perform in line with the European integrated oil and gas industry on a 12-18 month view". The investment bank believes Shell may announce significant mea­sures that "improve the company's ability to grow its mid-cycle returns by more than we expect", but also warned that Shell could make a "value-destroying acquisition¹' to seek upstream growth.

ABN Amro has been less optimistic, main­taining a "reduce" rating though ic has been pleased by Shell's corporate gover­nance review and its 2005 board proposals. Shell has said a proposal to abolish the Royal Dutch priority shares will be considered at the next meeting in 2005. Under the current rules, the Royal Dutch board effectively con­trol the group and its AGMs.

Shell's management struc­ture is partly blamed for the group overstating its oil and gas reserves estimates ear­lier this year, so this will come as welcome news to investors who view Shell's dual-board structure as antiquated.

Shareholders are also still smarting after Watts, who was the head of the division in charge of reserves when much of the over­booking occurred, received a severance pack­age worth more than £lm.