Shell to unite parent companies

Oct 28, 2004 02:00 AM

Shell, ending a century-old ownership structure, will combine its parent companies in the UK and The Netherlands to rebuild investor confidence after writing down its reserves four times this year. The shares of Shell, Europe's second-largest oil company, in London jumped as much as 6.4 %, which would be the biggest gain in three years. Jeroen van der Veer, formerly chairman and CEO of the new company from now, said the new structure will lead to better accountability for management and more clarity for investors.
"It looks like they are finally listening to shareholders, and there's optimism that the mistakes in the past won't be repeated," said Paul Morgan, a fund manager at Brown Shipley & Co., which oversees about $ 2.7 bn in UK stocks.

Van der Veer, 57, has to rebuild the credibility of Shell after the write-off of more than 20 % of its oil and gas reserves led to the departure of his predecessor, Phil Watts, and two other senior executives. More than a dozen shareholder lawsuits were filed, and Shell lost its top-tier credit rating. Shell agreed to pay about $ 150 mm in fines to regulators.
"I'm now the group CEO," Van der Veer said. "I can now speed up the execution of strategy." Shareholders will vote on the plan on April 22, Shell said.

Dating to 1907, the parent company is 60 %-owned by Royal Dutch Petroleum of The Hague and the rest by Shell Transport & Trading of London. The combination came when Henri Deterding's Royal Dutch combined with Marcus Samuel's Shell oil tanker and trading company, which was failing under too much debt.
The new company will be based in The Hague.

Shell may have to write off another 900 mm barrels of reserves, or 6.3 % of its holdings, a total that is now being reviewed, said spokesman Stuart Bruseth. That would be a fifth cut. Shell has audited 56 % of its reserves.
"This merger will only solve the governance problem," said Antoine Leurent, an analyst at KBC Securities in Paris. "Shell has another problem that is more important than that. In terms of exploration, Shell has had a very disappointing performance. The outcome of all this is that production will not start growing again until 2006."

Royal Dutch shares have lagged behind other oil companies this year, gaining 7.8 %, compared with the 16 % rally at BP as oil prices jumped. ExxonMobil, the world's largest publicly traded oil company, is up 19 %.
Deutsche Bank analysts including J.J. Traynor raised Royal Dutch and Shell to "buy" from "hold," citing the outcome of the strategic review. The analysts were rated third-best in the Thomson Extel 2003 survey. Before that, among the largest investment banks, only Merrill Lynch & Co. had a "buy" rating on Royal Dutch. Among all analysts, 27 % rated the company a "buy," with 29 % advising to "sell" the stock. The rest advise to hold the shares.

Shell said third-quarter net income rose 70 % to $ 4.41 bn from $ 2.59 bn a year ago, based on accounting that strips out costs from holding oil inventories. Analysts expected earnings of $4.35 bn. Sales rose 44 % to $ 71 bn from $ 49.4 bn.
Production fell to 3.61 mm bpd of oil equivalent from 3.67 mm a year earlier, Shell said. Shell's head of exploration and production, Malcolm Brinded, said the company is maintaining its forecasts for output.

Like BP, Europe's biggest oil company, Shell is benefiting from oil prices that reached a record $ 55.67 a barrel in New York and surging natural gas markets. As ExxonMobil and BP increase stock buybacks, Shell is boosting investments to restore its oil and gas unit. The company in September said capital spending through 2006 will be about $ 15 bn a year, about that of ExxonMobil. BP raised its spending target for next year to around $ 14 bn.
Shell will maintain a policy to increase dividends at least in line with inflation, Van der Veer said. The extra yield investors demand more than government debt, or spread, on Shell's EUR 750 mm ($ 955 mm) 3.5 % note maturing in 2007 fell 1 basis point to 18 basis points, according to Royal Bank of Canada prices, indicating investors see reduced risk in holding the securities. A basis point is 0.01 percentage point.

The committee of managing directors, a group of senior Shell managers that sets strategy for the entire group, will be abolished in favour of the new CEO, Van der Veer. Shell's unification and governance changes boosted the company's shares and its chance of catching up to BP and ExxonMobil, said Alan Beaney, a fund manager at Principal Investment Management in Sevenoaks, England, which oversees the equivalent of $ 1.1 bn, including $ 31 mm in Shell.
"The buck now stops at one person and you've taken out one layer of bureaucracy," he said. "It gives it a structure that makes it easier to close the gap on efficiency."

Source: Bloomberg
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