Shell profits shadowed by war concerns

Royal Dutch/Shell Group produced Europe's biggest corporate profit of 2002 yesterday but its shares sank on war worries and fears of an end to the oil price boom that powered its earnings.

As war looms in the oil-rich Middle East, top executives from the world's second largest oil firm and a key fuel shipper sent reassuring signals about global supplies.

"While we are by no means complacent, we feel that our own supply system and the structure of our supply contracts gives us the opportunity to respond very flexibly to what is likely to present itself," said Paul Skinner, head of refining and marketing at the Anglo-Dutch group.

Fourth quarter net profit, adjusted to reflect the current cost of supply, grew 46 per cent from a year earlier to $2.782 billion, in line with expectations, while yearly net profit dropped 23 per cent to $9.218 billion - but was still the best 2002 result so far from a European listed company.

Despite worries that it might soften its investment targets, the company reaffirmed its objectives in a strategy statement.

But after an initial climb, the company's shares turned some three per cent lower. Investors said fears of a fall in crude prices and uncertainty over the impact of war on global energy demand remained the key factor.

"Who's listening to good news?" said UK fund manager Stephen Ford at Brewin Dolphin, which has about £15 billion of assets under management. "I don't think there's any mood to listen until Iraq is resolved." Analysts also pointed to Shell's struggle to keep investment returns up, and to the problems it faces replacing oil reserves.

Shares in London-listed Shell fell 3.8 per cent to 364 pence by 1140 GMT and in Amsterdam Royal Dutch dropped 2.9 per cent to 37.50 euros.

In an accompanying strategy statement, Shell restated its investment returns targets and extended some of them to 2004. Shell slipped outside its 13 to 15 per cent underlying investment returns target last year, when returns on average capital employed (ROACE) at reference oil prices of $16 a barrel fell to 12.5 per cent.

Chairman Phil Watts told Reuters in an interview this was a "conscious decision", driven by the desire to make a series of acquisitions.

wThe company said getting back into the targeted ROACE range by 2004 would be a "priority".

The company spent $16 billion on acquisitions in 2002, including acquired debt.

Crude oil prices have risen to near 10-year highs, but analysts fear they will fall back after a decisive US-led war against Iraq, leaving oil companies with a smaller margin for error in management decisions.

Chairman Watts sent out reassuring signals. "The economic climate for our business remains uncertain and we expect continued volatility," he said. "I am confident, however, that the inherent strengths of our portfolio will be even more apparent in this environment."

But analysts said Shell still faces big problems, including a continued deterioration in its ability to replace reserves with new finds. "The thing we were concerned about most of all was the reserve replacement ratio ex-acquisitions, and we think it is a deterioration of what we saw at the Q3 results," said Jurjen Lunshof, analyst at Barnard Jacobs Mellet.

Shell said underlying reserve replacement in 2002 was just 50 per cent, down from 74 per cent in 2001, a number described by Lunshof as "quite startling". Merrill Lynch analyst Mark Iannotti called the 50 per cent figure "disappointing".

Fourth quarter oil and gas output rose to a record 4.18 million barrels of oil equivalent per day (boepd), up six per cent from a year ago, helped by the purchase of Britain's Enterprise Oil. Excluding Enterprise, output growth was one per cent. Watts told Reuters in a telephone interview that the group was ahead of plan in reaping synergy benefits from acquisitions, but that given the uncertain business climate the share buybacks of 2002 were unlikely to continue in the first half of 2003.

At a news conference in The Hague, Jeroen van der Veer, head of the Dutch arm of the business, said Shell would seek to improve the quality of its earnings through about $2 billion a year of disposals - in line with divestments made in recent years by the company whose total worth is put at about $150 billion. He did not specify where divestments would come.

Asked about the aftermath of a war in Iraq in terms of exploiting oilfields, he said: "If there is a new situation in Iraq then we hope there would be a level playing field for all companies."

Shell's British rival BP made similar noises last year - voicing fears that US firms may get the lion's share.