THE NEW YORK TIMES: Shell Makes Another Cut in Reserves; Profit Jumps: “The Royal Dutch/Shell Group reduced its proven oil and gas reserves by an additional 10 percent on Thursday, rattling investors yet again and increasing speculation that the company will ultimately have to buy a better-performing rival to compete with peers like Exxon Mobil and BP” (ShellNews.net) 4 Feb 05
By HEATHER TIMMONS
Published: February 4, 2005
LONDON: The Royal Dutch/Shell Group reduced its proven oil and gas reserves by an additional 10 percent on Thursday, rattling investors yet again and increasing speculation that the company will ultimately have to buy a better-performing rival to compete with peers like Exxon Mobil and BP.
The cut in reserves, Shell's fifth in just more than a year, came as the company reported record profits, buoyed by high oil prices.
Shell reported fourth-quarter net income of $4.48 billion, more than double the $1.9 billion it earned in the quarter a year earlier.
European investors were not impressed, though, and shares of the Shell Transport and Trading Company, one of the two companies that make up Royal Dutch/Shell, fell 8.25 pence (11 cents), or 1.7 percent, to £4.72 ($6.15) on the London Stock Exchange.
Shares of Royal Dutch Petroleum, the other company, dropped 0.93 euro ($1.21), or 1.4 percent, to 45.57 euros ($59.41) on the Euronext exchange.
Shell has been floundering since it first cut its proven reserve levels by 20 percent last January, prompting an investigation by the Securities and Exchange Commission.
Despite an overhaul that included the dismissal of three top executives and a plan to combine its century-old dual board structure into one company, market confidence in Shell has not fully returned. And so far, positive signs from the exploration and production business, which governs reserve levels, have been scarce.
On Thursday, Shell said it would cut 1.4 billion barrels from its proven oil and gas reserves, exceeding the 900 million barrels it warned were under new scrutiny in October. In total, Shell has lowered its proven reserves level by a third, or 5.8 billion barrels, from where it stood at the end of 2002.
The most recent cut came after the company retrained about 3,000 staff members to follow S.E.C. guidelines, Shell executives said. The restatement will cut $700 million from Shell's earnings from 2000 to 2004, or about 1 percent of income over the five years. A final 10 percent of Shell's reserves still need to be examined by an independent auditor.
The chief executive of Shell, Jeroen van der Veer, said during a news conference that Shell would be stronger in 2005 as executives focus their entire energy on the business, rather than counting reserves. Future growth will come from projects like the Kashagan field in Kazakhstan, he said, and a gas-to-liquid project in Qatar. Shell will be moving "more quickly and more decisively," in 2005, he said.
Some analysts were skeptical. "There is absolutely no sign of a recovery story under way for Shell," said Neil McMahon, an analyst with Sanford Bernstein in London, who rates Shell as market perform.
Shell is lagging behind its peers in some crucial performance guidelines. The reserve replacement ratio, a measure of how fast the company is finding gas and oil, will be 15 percent to 25 percent in 2004, including divestments and price changes, executives said on Thursday. It will also be under the industry benchmark of 100 percent in 2005, they said.
In contrast, Exxon Mobil's reserve replacement ratio in 2003 was 105 percent, the 10th consecutive year that it has been above 100 percent. Shell also said that it would produce 3.5 million to 3.8 million barrels of oil a day in 2005, down from 3.8 million a day in 2004.
Still, executives promised on Thursday that reserve replacement ratios would average 100 percent from 2004 to 2008, a figure that some analysts said could not be reached without an acquisition.
In response to questions about acquisition strategy, Mr. van der Veer said, "We are not shy about doing acquisitions, but it has to make money for shareholders." The company can spend every dollar only once, he added, and it needed to think carefully about whether it was better to invest the money to help the business grow, or to buy assets.
Because of the high price of oil, Shell and other companies are generating large amounts of cash. For example, in 2004, Shell generated $34.9 billion from operations and divestments, and had $6.5 billion in excess cash after paying back debt, making investments and paying dividends.
Shell said Thursday that it would divest itself of as much as $15 billion in assets by 2006, an increase from the company's previously announced plans to sell $12 billion. In addition to Basell, a chemical company, and InterGen, a power company, executives said they were putting Shell's Netherlands gas transmission business up for sale.
The company also said it would invest $15 billion to build the business in 2005, and spend as much as $15 billion on buybacks and dividends for shareholders during the year.
http://www.nytimes.com/2005/02/04/business/worldbusiness/04shell.html