Financial Times: Shell reassures with upbeat results

By Carola Hoyos and Friederike Tiesenhausen Cave in London

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

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

The move, which will be financed from strong cashflow 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. She said in a report: "The announced $2bn buy-back for 2004 includes stock option plans which last year absorbed around $700m. Therefore the 'genuine' buy-back is around $1.3bn for the year which is a small sweetener for shareholders."

However, analysts were generally pleased with Shell's first-quarter 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. This year's figure was buoyed by exceptional gains, including $348m from Shell's sale of its stake in Sinopec, the Chinese oil group.

Some observers commented positively on Shell's promise to step up capital expenditure, which is set to rise to $14.5-$15bn this year from the $13.5bn announced previously. But on closer examination the increased expenditure set aside to help meet Shell's biggest challenge - increasing its reserves life, which is now the shortest among its peers - was small. Only $200m of the $1-$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.

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 decreased under Mark Moody-Stuart, chairman, in 1998. "The way our exploration resources were deployed in the 1990s had too much focus on near field potential," he said. "We found good value, but we didn't find the volumes to get the 100 per cent reserves replacement."