THE WALL STREET JOURNAL: U.K. Fund Managers Beef Up Shell Stakes Ahead of Reshuffling: “Shell was wrestling with a drawn-out accounting scandal, and its share price languished. But since Shell announced a restructuring in late October, the Anglo-Dutch oil giant has handily outdistanced rival BP. Are investors buying Shell's turnaround story? Maybe not. (ShellNews.net) Posted 22 March 05
By CHIP CUMMINS
Staff Reporter of THE WALL STREET JOURNAL
March 21, 2005; Page C1
LONDON -- With petroleum prices soaring, investors had a pretty easy decision to make during much of last year when choosing between Europe's two biggest oil plays: BP PLC and Royal Dutch/Shell Group.
Shell was wrestling with a drawn-out accounting scandal, and its share price languished. But since Shell announced a restructuring in late October, the Anglo-Dutch oil giant has handily outdistanced rival BP.
Are investors buying Shell's turnaround story? Maybe not.
In October Shell said it will merge its two parent companies this summer into a single company with a single stock listed in London, a move that will shake up a number of European stock-market indexes. The unified Shell will naturally have a bigger market capitalization -- about $220 billion -- than that of its British parent, which trades on the London Stock Exchange. So, a number of British fund managers are snapping up Shell shares ahead of a steep increase in the company's weighting on two popular benchmarks in London.
Though analysts had long predicted a technical boost in the share price as portfolios are shuffled in Europe, such a move typically comes just before index weightings are changed. It is only then that so-called passive investors -- those whose portfolios track the index weightings closely -- have to buy or sell stock in a company based on its new share of an index's total value. In Shell's case, that isn't until July, when the restructuring is expected to be completed.
But several large "active" managers in the United Kingdom appear to have already started rebalancing their holdings to match the steep climb in Shell's weighting in the FTSE-100 and the FTSE All-Share indexes, two popular domestic benchmarks. Active fund managers pick stocks at their own discretion, as opposed to passive funds, which simply match an index. Active managers don't have to match indexes, but they often loosely approximate an index's makeup to reduce the risk their funds will lag behind benchmarks.
As part of the restructuring, Royal Dutch Petroleum Co., of The Hague, essentially will merge with London-based Shell Transport & Trading Co. Shell's weighting in the London FTSE All-Share index is currently about 3%, reflecting only the size of Shell Transport. After the combination with Royal Dutch, the combined company will make up more than 7% of the FTSE index.
The restructuring also will reduce or eliminate Shell's weighting in European indexes that exclude companies listed in Britain. Nizam Hamid, an index analyst at Deutsche Bank AG, figures sell orders by European managers who have to unload Shell shares will be sufficient to satisfy demand for the stock from the large number of passive managers in Britain looking to buy. But if active British fund managers also buy in large numbers, demand could jump.
"The big U.K. active funds are the big swing trades in this," Mr. Hamid said. Deutsche Bank has a "buy" recommendation on Shell and has done investment-banking work for the company, including advising it on its restructuring.
Goldman Sachs Group Inc., in a December report, estimated big Shell investors picked up about $1 billion of new Shell stock, based on company disclosures, shortly after the restructuring announcement. Some of the biggest buyers were British active investors, acquiring a net of about 98,000 shares, according to Goldman Sachs.
Derek Mitchell, director of U.K. equities for F&C Asset Management, a London-based fund company with roughly $230.89 billion under management, said Shell typically has made up about 3% of his portfolio. Now, he is at 5% as he bulks up ahead of the shuffling, he said.
Royal Dutch and Shell Transport rose 3% and 4%, respectively, between Dec. 31, 2003, and Oct. 27, the day before the restructuring announcement. That was despite a big rise in oil prices, and it compares with a 19% gain for BP. Royal Dutch is up nearly 10% since Oct. 28, and Shell Transport is up 11%. BP has climbed less than 7%.
In 4 p.m. composite trading Friday on the New York Stock Exchange, Royal Dutch shares rose 35 cents to $62.54, while Shell Transport rose 23 cents to $56.48.
To be sure, some of the Shell buying could be because of genuinely improving sentiment toward the company. Chief Executive Jeroen van der Veer appears to have won respect from many fund managers for starting to restore Shell's reputation. His decision to restructure Shell came in the wake of the company's massive energy-reserve overstatements.
A Shell spokesman said the company doesn't comment on its share price, but said "the start of 2005 has been good in terms of delivery on fundamentals," citing an agreement to start a big liquefied-natural-gas project in Qatar and the company's pledge to return more cash to investors through increased dividends and buybacks.
Write to Chip Cummins at chip.cummins@wsj.com
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