FINANCIAL TIMES: Lex live: Royal Dutch/Shell: "...has now downgraded more reserves than it falsely booked.”: “After Thursday's larger-than-expected downward reserve adjustment of 1.4bn boe, the total cumulative reserve downgrade stands at 5.87bn boe.”: “Shell's performance does not compare favourably with recent results from US rivals, such as ExxonMobil. Its management does not even appear to enjoy the confidence of its own workforce.” (ShellNews.net) 3 Feb 05
Royal Dutch/Shell has now downgraded more reserves than it falsely booked. Between 1996 and 2002, upward revisions contributed an estimated 60 per cent of Shell's total organic reserve additions - or 5.7bn barrels of oil equivalent (boe). After Thursday's larger-than-expected downward reserve adjustment of 1.4bn boe, the total cumulative reserve downgrade stands at 5.87bn boe.
The latest disappointment at least draws a line under the whole sorry "grand old Duke of York" saga. Investors can now focus on the fundamentals: a flat production profile, short reserve life and a woefully inadequate reserve replacement ratio. Shell's performance does not compare favourably with recent results from US rivals, such as ExxonMobil. Its management does not even appear to enjoy the confidence of its own workforce.
Fortunately for Shell, continued high oil prices provide headroom to sweeten the pill for investors. Net income for 2004 was a record $18.5bn and Shell will pay a 2005 dividend of at least $10bn. It has also relaunched a $3bn-$5bn share buyback programme.
Further short-term share price support will be gained from the unification of the company's dual structure, with a primary listing in London. Shell's weight in the FTSE All-Share index will more than double. While it will also drop out of some continental European indices, net demand is created as purely passive index funds shift their weights. Indeed Shell has outperformed BP by 12 per cent since the restructuring was announced in late October, closing the valuation gap with its rival based on debt-adjusted cashflow multiples. Shell's performance leaves a lot to be desired, but for now, technical factors should prevent shareholders from suffering.