The Scotsman: Oil giant proves it's still a winner

MARTIN FLANAGAN

CITY EDITOR

Fri 30 Apr 2004

Clearly, with these sorts of profits, to talk about Shell in the same voice as Enron and Parmalat is nonsense  

I SUGGESTED here yesterday that Shell would be very lucky if the market focused on its first-quarter trading results released later in the day, given the billowing, dark clouds over the overstated reserves scandal.

I was very wrong. Shell came out swinging, like the big energy beast it remains, with stunningly good trading figures, strong cash generation that will underpin increased capital spending going forward, and a US$2 billion (£1.1bn) share buyback aimed pretty unsubtly at repairing relations with the City.

The group’s shares rose 1.6 per cent, a decent day at the stock market office for a company that has had almost unremittingly bad ones since it came clean(-ish) on the reserves last January.

The latest numbers, including profits up 9 per cent at $4.25bn (£2.3bn), were a muscular reminder that Shell might have had unsavoury failings in its management procedures and personal relationships at the top, but they have not stopped it being a serious global cash generator.

This is far from saying the 22 per cent reserves-that-weren’t fiasco was a little local difficulty, and that a line has been drawn under it.

It wasn’t, and there hasn’t been. There are still regulatory investigations going on, both in the US and the UK.

The findings of these inquiries could damage Shell both financially and in terms of its severely-battered image.

There is still the possibility of criminal prosecutions about the subsequent cover-up of the reserves mis-statement; and it is quite possible that when ousted former chairman Sir Philip Watts breaks cover he will drag additional Shell executives down with him.

So far, former head of exploration and development Walter van de Vijver and chief financial officer Judy Boynton have resigned.

Some believe new Shell chairman Jeroen van der Veer has shown unlikely Teflon-qualities to date. He was on board in a senior position when the problem was unfolding, but has said somewhat blandly that he "didn’t appreciate its magnitude".

There is also the growing band of class action lawsuits being launched against the oil giant from the US.

But yesterday’s very strong trading news lends a useful perspective to the whole affair. Corporate governance was obviously very imperfect at a multinational previously thought of as respectably dull.

Clearly, however, with these sorts of profits and ambitious capital expenditure programmes, to talk about Shell in the same voice as Enron and Parmalat is nonsense.

This is a profitable company, in spades. It cannot be said that Shell’s trading resilience amid the reserves fallout can just be attributed to sky-high oil and gas prices either.

Shell also achieved higher refining and marketing profit margins in its downstream operations, as well as a better chemicals performance.

While Shell’s total oil and gas production was down 3 per cent in the quarter, it is still over 4 million barrels a day - ahead of its bigger, more redolent, rival BP.

As I have long suspected at many big companies, it looks like Shell’s non-board level senior management (as well as stunned middle management) have delivered the goods at a generally very seaworthy business while the board and City have fretted about the gales blowing around the masts.

The City, though well short of won over, obviously appreciates the share buyback, and the strong trading numbers and increased capital spending this year will have many of the institutions wondering whether they are underweight in the stock.

Shell has sent a powerful, if curious, message out to investors. We have been incompetent in an important business area. We have covered it up, which is hardly a character reference. Our internal e-mails show tremendous managerial tensions that went to the very top.

But, even so, we are still big enough, and straddle the earth enough, to gather great treasure even carrying those self-inflicted burdens and personal defects. Shakespearean Shell?

http://business.scotsman.com/index.cfm?id=486522004