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Financial Times: Lex: Shell: Investors can be a churlish lot…

Published: February 3 2006 02:00
Investors can be a churlish lot. Unveil $25bn of profits, as Royal Dutch Shell did yesterday, and what happens? The shares fall by 2 per cent.
In the world of Big Oil, it takes more than just big numbers to impress – particularly coming so soon after ExxonMobil's stellar results. Shell's upstream production in 2005 fell 7 per cent. Reserve replacement of 60-70 per cent means Shell must now replace 130 per cent of production over the next three years to meet its targets. Shell has an impressive drilling record and some of those infamous “lost” reserves to rebook, but that is still a tall order.
At the operational level, Shell is performing decently enough. Beyond 2008, the breadth of its portfolio holds great promise. Most investors, however, rightly discount jam tomorrow. Meagre dividend growth and a $5bn target for share buybacks in 2006 suggest the management is hoarding cash. That not only emphasises the risk of high-priced acquisitions, but is no way to keep shareholders sweet while they wait. Meanwhile, the tailwind from surging oil prices will ease, even if an Iranian crisis causes a short-term spike.
In the past year, Shell's discount to BP on a prospective price/earnings multiple has narrowed from 22 per cent to just 8 per cent. That is despite BP's higher growth, and the potential for it to give away $20bn this year to keep its own shareholders on board. On that basis, Shell cannot complain.

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