Financial Times: Strong results a respite for Shell

By Carola Hoyos and Friederike Tiesenhausen Cave

Published: April 30 2004 5:00 | Last Updated: April 30 2004 5:00

Royal Dutch/Shell, the embattled energy group, gained some respite from its reserves worries yesterday, reporting strong first-quarter figures and promising investors a $2bn (£1.13bn) share buy-back programme this year.

The move, which will be financed from strong cash flow thanks to high oil prices, sent the group's shares to their highest levels since January 9, when Shell cut 20 per cent of its proved oil and gas reserves.

But Irene Himona, analyst at Morgan Stanley, pointed out that Shell's buy-back fell far short of that of BP, its closest European rival, which spent $1.25bn in the first quarter of this year alone.

Analysts were generally pleased with the results, which exceeded most forecasts. "Today's news is broadly positive," said JJ Traynor, analyst at Deutsche Bank, but he added: "Setting aside the legal issues, Shell is facing considerable challenges. Closing the value gap [to other oil majors] will require market confidence in management."

Adjusted net income, which takes account of the costs of supply, rose 9 per cent to $4.25bn from $3.89bn in the same quarter last year. However, this year's figure was buoyed by exceptional gains, including $348m from Shell's sale of its stake in Sinopec, the Chinese oil group.

Shell also promised to step up capital expenditure by $1bn-$1.5bn to $14.5bn-$15bn this year. But observers said the extra amount set aside to help meet Shell's biggest challenge - increasing its reserves life, which is now the shortest among its peers - was relatively small.

Only $200m of the $1bn-1.5bn increase will be spent on additional exploration, while $500m will go into short-term quick payback, high-margin opportunities mainly in the UK and US. The rest of the increase is to be allocated to cost over-runs. Shell confirmed cost over-runs at Bonga in Nigeria and Sakhalin in Russia, two of its most important long-term projects.

Standard & Poor's, the rating agency, yesterday said this and an erosion in oil and gas production, which fell by 1 per cent compared with last year, had led it to retain Shell on CreditWatch negative. Earlier this month, S&P cut its long-term rating on the group to AA-plus from AAA.

Malcolm Brinded, head of exploration and production, blamed Shell's low reserves life on decisions made in the 1990s. He said that, with hindsight, spending was allocated to the wrong projects and then dramatically decreased under Mark Moody-Stuart, then chairman, in 1998.

Earnings per share in Shell Transport, based on unadjusted net income of $4.43bn, stood at 10.1p. Turnover excluding taxes rose to $76.23bn, fuelled by oil prices that were on average 3 per cent higher than last year. In a flat London market, shares in Shell Transport closed up 6¼p, or 1.6 per cent, at 393p. Shares in Royal Dutch closed 0.7 per cent higher at ?40.64.