Royal Dutch/Shell Group cut its reserves for a fifth time, showing its oil and gas holdings were at least a third lower than reported in 2002 after the company misled investors and failed to find new fields.

Shell today reduced its estimate of 2003 reserves by 1.4 billion barrels, or 9.8 percent, to 12.95 billion and said its investigation of the figures is complete. Reserves probably fell further in 2004 and will decline this year before recovering, Shell said. The shares of Europe’s second-largest oil company lost 1.7 percent, the biggest drop since Sept. 23.

The company has “a huge mountain to climb” to find new reserves, said Neil McMahon, an oil analyst at Sanford C. Bernstein in London with a “market perform” rating on Shell. “Nothing in this company seems to be working at all.”

Two-thirds of Shell’s most prospective wells in 2004 were dry holes, and oil output won’t rise until 2007, Chief Executive Officer Jeroen van der Veer said during a conference call from The Hague. Because of the reserve write-offs, first disclosed in January 2004, Shell paid $151.5 million in U.S. and U.K. fines, dismissed three executives and lost its top-tier credit rating. The U.S. Justice Department is conducting a criminal probe.

Fourth-quarter net income tripled to $5.13 billion from $1.69 billion a year earlier, based on accounting that strips out gains from holding oil inventories, Shell also said today. Revenue jumped 54 percent to $76.4 billion. Shell’s $18.5 billion 2004 profit is a record in Europe.

Shell’s `Millstone’

Oil and gas reserves are a benchmark for valuing companies, because they form the basis for future production and sales. Exxon Mobil Corp.’s 2003 reserves were 21.2 billion barrels, 64 percent larger than those of Shell.

Reserves may fall again in 2004, because Shell replaced only 45 percent to 55 percent of its production, excluding divestments and before adjusting to reflect prices. After those adjustments, the figure will be 15 percent to 25 percent, Shell said.

“Reserves remain a millstone around Shell’s neck,” ING Financial Markets analysts including Jason Kenney wrote today. “Shell will lag peers in terms of volume growth and profitability for at least 12 to 18 months yet.”

The Shell Transport shares fell 8.25 pence to 471.75 pence as of 4:35 p.m. in London. Shell last year gained 6.9 percent as oil prices rose to a record, lagging behind BP Plc’s 12 percent jump after Shell on Jan. 9, 2004, said its 2002 estimate of 19.4 billion barrels of oil and gas reserves was overstated by 25 percent.

Shell’s oil and gas output equalled 3.8 million barrels in the fourth quarter, down from 4 million in a year earlier.

`Window Dressing’

Shell boosted its potential sale of businesses in the two years through 2006 to $15 billion from $12 billion. The company also resumed its share buyback for 2005, planning to spend as much as $5 billion to return surplus cash to shareholders. Most of the buyback will take place in the second half of the year, Peter Voser, chief financial officer, told investors in London.

“The share buyback is window-dressing, a non-event,” said Han van Lamoen, an analyst at Amsterdam-based FBS Bankiers NV who has an “add” rating on Shell. “I would have preferred them to spend more on the dividend or upstream investments” on drilling.

Not all investors have abandoned Shell.

“People are still doubting all that Shell says,” said Gert- Jan Geels, a managing partner and money manager at Eureffect in Amsterdam who says he’s looking to buy Shell shares. “We say, forget the past and look at the more positive angle. There is still a discount on the shares compared with peers, and part of that is unjustified.”

Shell’s London-listed shares trade at 13.8 times forecast earnings, compared with 15.6 times profit at BP.

Irving, Texas-based Exxon Mobil, the world’s largest publicly traded oil company, on Jan. 31 said fourth-quarter profit rose 27 percent to a record $8.42 billion and reported a $25.3 billion profit for 2004, the second-highest in U.S. history. It didn’t give 2004 reserves figures. BP, Europe’s biggest oil company, will report its earnings on Feb. 8.


Royal Dutch/Shell three months ago announced plans to combine the boards and shares of its parent companies in the U.K. and Netherlands, ending almost a century of dual ownership. The restructuring is prompting some funds to buy the shares because they need to track index changes.

Van der Veer, 57, will run the combined company, to be called Royal Dutch Shell Plc. Shell may need acquisitions, potentially including BG Group Plc of the U.K. or Canadian oil-sands miners, said Sanford C. Bernstein’s McMahon.

“We prefer to invest $15 billion in organic investments,” Van der Veer said. “If we can make good money with an acquisition, we will not shy away from it.”

The planned combination of Shell’s two parents will improve accountability and clarity to investors, Van der Veer said in October.

Selling Assets

Net income a share for Royal Dutch during the fourth quarter was 1.03 euros ($1.34), an increase from 0.48 euros a year earlier. For Shell Transport, quarterly net income a share rose to 10.2 pence (19 U.S. cents) from 4.7 pence.

BP, led by Chief Executive John Browne, in 2003 replaced Shell as the world’s second-largest publicly traded oil company behind Exxon Mobil.

Shell said July 29 it may sell its half stake in Basell, a polyolefins venture with BASF AG, the world’s biggest chemicals maker. Polyolefins are a type of polymer plastic derived from chemicals called olefins and used to makes products from outdoor furniture to diapers. That sale may happen this year, Shell said.

Mathew Carr in London at [email protected]
Tim Coulter in London at [email protected]