Shell starts drilling to regain confidence

Nov 02, 2004 01:00 AM

Shell, after uniting its parent companies and boards, must find the next generation of oil fields to rebuild reserves and gain investor trust, CEO Jeroen van der Veer said.
"We are going for big finds," he said in London. "We have already increased our exploration expenditure. It's important to find new reserves so we can start additional production."

Shell, the third-largest publicly traded oil company, said it will drop its century-old dual ownership, responding to investor calls for change after writing off a fifth of its reserves in January. The announcement led to the departure of former chairman Phil Watts and two other senior executives. Shareholders filed more than a dozen lawsuits, and the company agreed to pay about $ 150 mm in fines to regulators.
The combination of Royal Dutch and Shell "is a first step, but the company isn't where it should be by a long shot," said Wouter de Ridder, who is part of a team at Kempen Capital Management in Amsterdam that oversees about $ 6.7 bn,including Royal Dutch and Shell Transport & Trading shares. "Step two is to improve the company's operations."

Shell will combine its two parent companies in the UK and The Netherlands into a single business that will be incorporated in the UK and based in The Hague. Van der Veer was named CEO of the new Shell Plc, reporting to a single board. The committee of managing directors that ran Shell was abolished.
The company probably won't want to make acquisitions to boost its reserves in the short term after record oil prices helped drive up the price of assets, said investors such as Theo Kraan, who is part of a team managing $ 2.5 bn at CenE Bankiers in the Dutch city of Utrecht.
The change is a "very sensible move, but they aren't going to get any more oil out of it," said Andrew Green, who manages the equivalent of $ 900 mm in UK stocks at SG Asset Management in London. "They need real operational and strategic improvements."

Royal Dutch shares have lagged behind competitors such as BP, the world's second-largest oil company, and ExxonMobil, the world's largest, who benefited this year as oil prices surged to a record $ 55.67 in New York. Royal Dutch is up 2.4 % this year, while BP advanced 17 % and ExxonMobil gained 19 %.
"Shell is having to run twice as fast to keep up with the ExxonMobils and BPs of this world," said Fadel Gheit, a senior vice- president of oil and gas research at Oppenheimer & Co in New York. "They are putting in a lot more resources to get lower results. Most other companies are much more efficient."

Shell said it would invest about $ 15 bn a year on capital spending, including about $ 1.5 bn to search for new deposits. It's planning as much as $ 12 bn of asset sales, including its InterGen venture with Bechtel Group. Shell's third-quarter production fell to 3.61 mm bpd from 3.67 mm a year earlier. BP in the period produced 3.91 mm bpd of oil and gas, up from 3.5 mm a year ago, and is targeting an average of more than 4 mm bpd in 2004, an 11 % increase from 2003.
"Royal Dutch shares are in every Dutch investor's portfolio, but we've been disappointed by the lack of progress," CenE Bankiers' Kraan said.

ExxonMobil has increased its stock buybacks and raised its dividend because of rising earnings and cash flow. Shell intends to increase dividends at "least in line with inflation," Van der Veer said.
Shell reported 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.
"The main challenge remains the under-investments in finding new reserves," said Kempen's De Ridder. The threat of more reserve losses "underlies the need to tackle this issue as soon as possible”.

Shell said it may have to write off another 900 mm barrels of reserves, or 6.3 % of its holdings, a total that it is now reviewing, said Malcolm Brinded, the head of exploration and production. That would be a fifth cut this year. The company also said it was dropping a forecast for its 2004 reserve-replacement ratio. Shell predicted it to would replace 60 % to 80 % of its reserves in 2004. It made no new forecast.
"We have a lot to do in Exploration and Production, but we have a clear strategy and direction," Brinded said in London.

Shell's declining production and reserves were a legacy of cost-cutting during the 1990s, when oil prices were lower and the company focused on drilling near existing rigs and pipelines, rather than seeking big deposits.
"There needs to be some sort of volume growth, and Shell's reserve ratio needs to go up," SG Management's Green said.
Shell spent less than $ 10 bn a year on capital projects in the late 1990s, while rivals bought or merged with competitors.

Source: China Daily
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