Reuters: Shell posts record profit: “Royal Dutch/Shell Group has revived concerns about its oil reserves by making another big reserves cut and reporting disappointing results in finding new oil supplies in 2004. The news overshadowed the biggest profit in UK corporate history and plans for higher dividends and share buy-backs” (ShellNews.net) Posted 4 February 05
By Tom Bergin, European Oil and Gas Correspondent
LONDON (Reuters) - Royal Dutch/Shell Group has revived concerns about its oil reserves by making another big reserves cut and reporting disappointing results in finding new oil supplies in 2004.
The news overshadowed the biggest profit in UK corporate history and plans for higher dividends and share buy-backs.
Surging oil prices and strong refining margins pushed Shell's fourth-quarter profits up to $5.127 billion (2.7 billion pounds) on a current cost of supply basis, the measure preferred by analysts. That figure was up 204 percent from the same period of 2003.
Full-year profits by this measure were $17.59 billion, or $18.54 billion on a historical-cost basis. Analysts said both figures exceeded any profit ever recorded by a UK-listed firm.
Excluding one-off gains of $318 million, the fourth-quarter figure was in line with a Reuters poll of 12 analysts which produced a consensus forecast of $4.826 billion.
News of the higher pay-outs to shareholders cheered investors but Shell's fifth reserves cut in just over a year, and news that new oil discoveries only matched around half the volume of oil Shell pumped last year, weighed on the stock.
"Coming to the market so many times and telling us about the oil reserves is not just careless, it's getting a bit predictably boring," said Henk Potts at Barclays Private Clients.
Shell's reserves now stand one third below the level originally reported for December 2002.
Shell shares closed down 1.7 percent at 471-1/2 pence on Thursday, while Royal Dutch closed down 1.4 percent in Amsterdam at 45.57 euros, versus a European oil and gas sector index down 0.5 percent.
Some dealers said the fall was also partly due to profit expectations having risen after U.S. majors Exxon Mobil and ChevronTexaco reported forecast-beating results.
RESERVE TARGETS UNCHANGED
Shell has struggled to rebuild investor confidence after its reserves over-booking scandal last year which led to the sacking of top management and raised serious concerns about the company's ability to replace the oil it pumps with new finds.
The firm said it had completed its reserves review and would restate around 1.4 billion barrels of oil equivalent (boe), worse than estimates by analysts of around 900 million.
Chief Executive Jeroen van der Veer said he was confident the company would not have to make further reserve cuts and reiterated his head was on the block over the matter.
"We have taken the steps necessary to close out the reserves issue," van der Veer said.
The company stuck to its target of 100 percent reserve replacement over between 2004 and 2008, adding that the biggest bookings of new reserves would come at the end of this period.
Ironically, the latest downgrade may make this target easier to achieve. Exploration and Production boss Malcolm Brinded said the downgraded reserves were likely to be re-booked later.
Shell has now downgraded 5.874 billion boe, equivalent to over 4 years' production. If it rebooks all this over the next 4 years, it would only have to make small finds to hit its target.
Brinded said the target did include re-booked reserves but declined to say to what extent, adding the company's main focus was to replace reserves with new finds.
Shell, the world's third-largest oil group by market value, got off to a bad start at this in 2004, hitting a replacement level of 45 to 55 percent. Including year-end pricing effects and divestments, the figure could be as low as 15 percent.
Shell struck hydrocarbons at 5 of the 15 "big cat" wells it drilled but the size of the finds had been disappointing.
Shell's oil and gas production, at 3.8 million boe per day for 2004, was at the top end of its previously stated range but down on 2003. The company expects production of 3.5-3.8 million boe per day over the next two years.
Speculation has mounted that Shell may make a large acquisition to boost its reserves but van der Veer downplayed this, indicating that at today's high oil prices money was better spent investing in exploration and production.
MORE CASH FOR SHAREHOLDERS
While dealers were disappointed by the reserves, analysts were more optimistic about Shell's big cash pay-outs.
Shell, which plans to ditch its dual Dutch/British holding company structure later this year, said it would pay dividends of at least $10 billion in 2005, up from $7.2 billion in 2004, and buy back shares worth $3 billion to $5 billion, compared with $1.7 billion in 2004.
"The move to buy back shares and the dividend increase are positive. The writing down of reserves is disappointing but hopefully they've drawn a line under the affair," said Cavendish Asset Management fund manager Paul Mumford, whose portfolio includes Shell shares.
Shell also raised its divestment forecast to $12-15 billion from $10-12 billion for 2004-2006, boosting the cash likely available for shareholders. Shell made $7.6 billion in divestments in 2004.
While the upstream division was the main profit driver, van der Veer said the oil products division also had a "great year".
Shell's record earnings prompted anger among trade unions and environmental groups.
Tony Woodley, General Secretary of the Transport and General Workers Union, said the figures argued for the introduction of a windfall tax to curb excessive profits in the oil sector. The Treasury swiftly knocked down the call.