Shell's investors are beginning to lose confidence

national | miscellaneous | other press Wednesday December 13, 2006 23:37 by StripeyCat

The pecten is losing its standing as a symbol of financial security

Over the Christmas, on some channel at some time of the day or night, it is pretty inevitable that Billy Wilder's excellent film, Some Like It Hot, will be shown.

In the movie, when Tony Curtis wants to impress Marilyn Monroe about how financially secure he is, he picks up a sea shell and holds it up, to indicate that his investments are secure and, to say the least, high-yield.

Recently however, a slew of financial and economic pundits have been sounding warnings about the company's future. Problems with the Sakhalin 2 project in Russia, the Bolivian re-nationalisation, and the worsening security situation in Nigeria, are making investors wonder whether there is a deep problem with the way Shell do things.

The problem is often said to go back with the crisis in confidence caused by Shell's admitting that it had massively overstated it reserves in early 2004. Lying on such a grand scale makes even the most hard-nosed business people uncertain, and investors don't like uncertainty.

Shell insiders say the problems go back much further, even to the late 1980's. A corporate maliase seems to have settled on the company's higher echelons, and the methods of the Shell old-hands who were rooted in the ways of the company from the engineering and production side of the business steadily lost out to a more desk-bound model. After the murder of Ken Saro Wiwa, a system of involving publicity and public relations consultants at every level was adopted.

I spoke to a former Shell geologist who saw his staff laid off and brought back on short term contracts, while more and more press liaison and publicity staff were hired.

Papering over the cracks like this will of course work for a while, but investors can't be kept waiting for ever, and while the company is enormously profitable for now, it's not at all clear whether things are going to stay that way.

Shell really need some positive news from Corrib, so they may even make a short term decision to cut their losses and go offshore. With the more militant members of the Shell to Sea campaign talking up the prospects of a return to Bellanaboy for more days of action in the new year, that might be wise. Wisdom, however, seems in short supply in Corrib House.

I wonder if Billy Wilder was making Some It Hot today, would he have Tony Curtis use a different prop to indicate his financial worth?

The following two articles are from a quick trawl of the financial press, of rmore like this, just type "Shell" into Google news.

Royal Dutch Shell Not Looking Too Regal
From Finance Advice Website: http://www.fool.com/news/commentary/2006/commentary0612...9.htm

In simple terms, Royal Dutch Shell faces a number of troubling issues that include a relatively weak production profile, one of the lowest reserve replacement ratios among the majors, and problems with regard to its operations in both Russia and Nigeria.

By Will Frankenhoff
December 13, 2006

Despite the recent decline in the price of crude, I remain quite bullish on oil companies over the next couple of years, because of -- among many other things -- continued demand growth, limited spare production capacity, declining production rates in key regions such as the North Sea, and the uncertain political environment in many oil-producing nations.

On the other hand, to steal a quote from George Orwell's immortal Animal Farm, "All animals are created equal ... but some are more equal than others." That sentiment certainly applies to the oil industry. While I believe that most major oils -- ExxonMobil (NYSE: XOM), PetroChina (NYSE: PTR), and Motley Fool Income Investor pick Total (NYSE: TOT) come to mind -- will continue to prosper as a result of their strong production growth profiles, high reserve placement ratios, and generally moderate valuations, there are a few companies that investors might be better off avoiding in the near term. Royal Dutch Shell (NYSE: RDSa) is one such company.

In simple terms, Royal Dutch Shell faces a number of troubling issues that include a relatively weak production profile, one of the lowest reserve replacement ratios among the majors, and problems with regard to its operations in both Russia (political pressure) and Nigeria (escalating violence).

Let's drill into these issues, shall we?

Royal Dutch Shell
Originally formed in 1907 through a tie-up between Britain's Shell Transport and Trading and Netherlands-based Royal Dutch Petroleum, Royal Dutch Shell is one of the largest integrated oil and natural-gas companies in the world. In 2005, the company produced approximately 3.5 million barrels of oil and equivalents (BOE) per day, with proven reserves of roughly 11.5 billion BOE, 58% of which was natural gas.

Production growth
Given the company's long history of operations, you'd think that Royal Dutch Shell would have a better grasp of production issues. Simply put, the company has not had any production growth since 2002. In fact, production has declined in each and every year, and 2006 looks to be no different. Royal Dutch Shell recently cut its production forecast for 2006 to 3.4 million BOE/day, down from its previous prediction of 3.5 million to 3.8 million BOE/day ... which will represent yet another annual decline in production.

Call me crazy, but to continually reduce forecasts isn't the best tonic for a company that is still trying to regain investor confidence after having to restate its reserve base by a massive 20% (or 3.9 billion barrels) back in January of 2004.

Is there light at the end of the tunnel for long-suffering investors? It doesn't seem so, if Royal Dutch Shell isn't somehow able to get its reserve replacement ratio increased.

Reserve replacement
When the company reported that it had replaced just 75% of its reserves in 2005, it marked the fifth consecutive year that its reserve replacement ratio fell below 100%. In fact, that number was actually an improvement -- it brought the company's five-year average reserve replacement ratio up to an anemic 70%. That means that at current rates of production, Royal Dutch Shell's reserves will last only 8.8 years, one of the lowest rates among the major oils.

Ouch.

And investors shouldn't look for any quick fixes coming out of the company's operations in either Russia or Nigeria.

Russia and Nigeria
Royal Dutch Shell has had a bit of bad luck with regard to its Sakhalin-2 project in Russia. Just as this $22 billion project is nearing completion, Royal Dutch Shell has been coming under pressure from the Russian government in the form of environmental lawsuits seeking the revocation of the project's approval -- a bald-faced attempt to allow Russian energy giant Gazprom to grab a slice of the pie. This tactic seems to have worked; recent reports indicate that Royal Dutch Shell has offered to cede control of the project to Gazprom while retaining a blocking stake of at least 25%, in exchange for a stake in one of Gazprom's natural-gas fields and some cash.

While political pressure has been the problem in Russia, escalating violence over control of the oil-rich Delta region has been the issue in Nigeria. In the past quarter alone, Royal Dutch Shell's production in the region was 185,000 barrels per day lower than last year's total, as a result of security concerns. The situation looks to be worsening, as the recent kidnapping of yet more foreign oil workers indicates.

Conclusion
Given the issues I've reviewed here, I believe that shares of Royal Dutch Shell are expensive trading at roughly 12 times forward earnings, a 10% premium to peers such as BP (NYSE: BP). I'm not saying that Royal Dutch Shell is a horrible company. I'm just saying there are better options out there for energy-hungry investors.

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Stepping on the gas

from the Guardian
http://commentisfree.guardian.co.uk/brian_wilson/2006/1....html

Russia's natural assets are highly political and the Kremlin will act politically in order to defend and exploit them.
Brian Wilson

December 12, 2006 02:08 PM |

Nobody should be surprised by the Russian government's decision to remove Shell from its leadership role in Sakhalin-2, the world's biggest offshore oil and gas project. The whole thrust of policy under President Putin has been to reassert Russian control over assets which were, in the Kremlin's current view, surrendered far too lightly.

The action should help to remove a few more rose-coloured spectacles from those who have chosen to convince themselves that Russia, with the fall of communism, automatically became a fully paid-up member of the international capitalist world. The ideology may have changed but "the patrimony of Mother Russia", as I once heard it described, is staging a major comeback.

The idea that Russia needed foreign companies to develop its natural assets is one that has always rankled with many Russians, who might have embraced a change in the political system but never saw any reason to believe that democracy was incompatible with state control. After all, the Soviet Union had been running its own oil and gas industries pretty successfully for decades without the aid of Shell and Exxon Mobil.

I remember being struck by this when I visited a city in Siberia called Khanty Mansisk, capital of a region of the same name. Unless you are in the oil industry, it is unlikely that you have even heard of Khanty Mansisk, which is the size of France with a population of 1.5 million, most of them imported from other oil-producing parts of the former Soviet Union. Yet the astonishing truth is that if Khanty Mansisk was a separate country, it would be the world's second biggest oil producer, behind only Saudi Arabia.

The next astonishing truth, at least to western perceptions, is that there is not an American in sight in Khanty Mansisk. The idea that outside expertise is needed to develop Russian resources is not only incomprehensible but also offensive to the people who have been doing exactly that for decades.

In the case of Sakhalin, the sheer scale and technical complexity of these vast offshore fields made it seem necessary if not necessary desirable, in the early days of relative economic liberalism, to bring in the foreign oil majors. Sakhalin-1, due to come onstream next year with 225,000 barrels per day, has been led by Exxon Mobil. Sakhalin-2 has been a partnership between Shell and the Japanese companies, Mitsui and Mitsubishi.

The project has been fraught with problems and delays, conveniently strengthening the case for the Kremlin to ask why they were leaving these companies to lead. The decision to dilute their stakes while Gazprom effectively takes over control of the project therefore has a technical rationale. But underpinning all such arguments is the political reality - that Russia is determined to retrieve the assets that were given away far too cheaply in the early post-Soviet period.

BP will be watching these developments with considerable apprehension. They have made a massive commitment to Russia and only last month, through their partnership with Rosneft, signed agreements to develop Sakhalin-4 and 5. They certainly believe that their own relationships with Russian companies, and the way in which they have developed, gives them greater protection against retrospective interventions by the state.

However, I can't help remembering a conversation with a very senior BP figure in Moscow a couple of years ago when he said: "It's OK for John Browne in London being so enthusiastic about Russia. But he's not there when the synchronised raids on BP offices across Russia are taking place on a Friday afternoon."

The wider lesson for Britain to learn is quite straightforward - that Russia's natural assets are highly political and that the Kremlin will act politically in order to defend and exploit them in the Russian interest. That it is why it would be an utter folly to become hugely over-dependent on gas imports from Russia, a policy that was cheerfully subscribed to around Whitehall until very recently but which, belatedly, is now being urgently reappraised.