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Shell Shares Slide As Investors Take Fright Oil and Gas Exploration and Production Reaps Rewards

Posted on: Friday, 29 July 2005, 09:00 CDT

SHARES in the newly-unified oil group Royal Dutch Shell dipped yesterday as investors reacted warily to the company's lacklustre first-half figures which were buoyed largely by soaring global crude prices.

Announcing its first results since becoming a single company earlier this month, Shell said half-year profits were pounds - 5.84bn, thanks largely to higher oil prices.

The figure - equivalent to pounds -1.3m an hour - mirrors the profits of rival BP earlier this week, which established a new record for a UK company.

The main driver of Shell's profits growth was the upstream oil and gas exploration and production division, where profits rose sharply on booming oil prices. Crude oil reached a record dollars - 60 a barrel in the second quarter.

Jeroen van der Veer, chief executive, said: "Building on the excellent start to this year, these are good second-quarter results, benefiting from a good operational performance as well as higher prices and margins. We still have much to do, especially in improving our exploration and production project delivery."

The shares finished down at 1759p, a 31p fall.

Shell has pledged to increase the amount of money invested on exploring for oilfields to dollars -1.8bn in both this year and next, up from the previous guidance of dollars -1.5bn. The extra cash reflects concerns among investors that the oil giant is struggling to replace the oil it pumps out of the ground after downgrading its reserves five times over the past 18 months.

Anglo-Dutch Shell opted to overhaul its near century-old dual- board structure following criticism from investors. The complex arrangement was blamed by some analysts for contributing to last year's reserves over-booking scandal.

Shell made profits of dollars -5.7bn from its core exploration and production business and announced 12 drilling successes in the second quarter, including fields in Australia and Nigeria.

More than 3.52 million barrels of oil equivalent were produced each day, which van der Veer described as "slightly above our expectations".

The outlook for daily production in 2005 was unchanged at between 3.5 million barrels and 3.8 million barrels, Shell said.

The positive news comes a fortnight after its exploration and production unit suffered a new setback when it revealed that its flagship Sakhalin II gas project was likely to cost dollars -20bn - twice its original budget.

Tony Shepard, at Charles Stanley, said: "There has been a disappointing start to the unification of Royal Dutch and Shell. The bombshell that the Sakhalin 2 project could cost dollars -20bn rather than dollars -10bn has shocked investors, and news on Sakhalin could have possible implication for other projects."

Inresponse to criticism about Sakhalin, van der Veer said: "We must improve our project management."

Like BP earlier this week, Shell sought to play down the impact higher oil prices were having on petrol station forecourts around the UK.

While van der Veer conceded that motorists were having to pay more now to fill up their cars, he conceded that the cost of fuel was "really very substantial".

Adding that a large proportion of the total cost of petrol was down to taxation, he said:

"The profit element in the downstream compared to what you pay at the pump is very minor compared to the total price."

Shell pledged to continue its strategy of buying back shares and paying dividends.

Source: Herald, The; Glasgow (UK)

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