Outlook: Phil and Judy show keeps us guessing at Shell

Bruising cruise; Rough luck
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The Independent Online

Phil Watts, the new chairman of Royal Dutch Shell, has spent the last six months contemplating how to make his mark on the world's second biggest oil company. His predecessor, Sir Mark Moody-Stuart, had no difficulty, thanks to the most striking pair of eyebrows in the North Sea and a "roadmap" which Shell followed so successfully that its return on capital rose by 50 per cent and its costs fell by $5bn a year.

Mr Watts has a physicist's view of the world and a rather duller sounding set of "reference conditions" which will guide Shell for the next five years. After all the grind and self-denial of the Moody-Stuart years, there is nothing that Mr Watts and his new finance director Judy Boynton would like more than to allow Shell to reap the fruits of all its hard work. Thanks to largely buoyant oil prices and attention to cost-cutting, Shell has no debt to speak of and healthy enough returns on capital to allow Mr Watts to cut his exploration managers a little more slack. With an ungeared balance sheet, Ms Boynton has also made it clear that Shell could easily afford to splash out $20bn on the right acquisition without putting its triple A credit rating at risk.

Even so, the investment community still doesn't quite know what to make of the Phil and Judy show. Mr Watts' chairmanship got off to a rocky start in August when he warned off "uncertainties" surrounding the company's production targets and then took six weeks to clarify what he meant while the markets sliced £4bn from Shell's stock market value.

Yesterday's annual strategy review appeared to leave investors a little happier, even if the message remains a little confused. On the one hand, Shell is sticking with its downgraded production targets of 3 per cent annual growth. On the other hand, it is relaxing its constraints on new field development which ought to feed through into increased production.

The truth, as Shell conceded yesterday, is that a big jump in production will only come through a big acquisition. There is, however, nothing much around to buy. While the Moody-Stuart years were spent adjusting Shell's cost base to an era of $10 oil, Lord Browne over at BP seized the opportunity offered by the low oil price to embark on a very effective buying spree, snapping up Amoco and Atlantic Richfield in quick succession. Other than Conco, or perhaps our own BG, which might be complicated for Shell to swallow for regulatory reasons, there is a dearth of suitable takeover targets.

There is also the threat, not discounted by Mr Watts, of the world economy getting considerably worse before its gets better. He may yet end up donning the hairshirt himself.

Bruising cruise

It is cocktails at dawn among the white tuxedo set. There was always a strong chance that last month's nil-premium merger between P&O Princess Cruises and Royal Caribbean, would provoke the ire of the market leader. And so it has. The deal would have created the world's largest luxury cruise operator, toppling America's Carnival Corporation off its perch where it has happily resided for 20 years. Yesterday Carnival steamed in, foghorn blaring, with the mother of all hostile bids for P&O Princess. You could almost see Lord Sterling turning green with sea sickness.

P&O Princess has rejected the bid on the grounds of price and deliverability (code for regulatory risk). The market seemed to take a similar view with P&O Princess shares standing way short of the 456p per share offer price.

At first sight, the value offered by the Carnival deal looks much richer. It offers 456p per share against the 360p closing price the day before Carnival went hostile. But analysts are putting a similar future value on the P&O Princess-Royal Caribbean tie up if the deal gets the nod from the regulators.

Carnival's takeover would put the world's number one and number two cruise operators together. The combined entity would have almost 50 per cent of the US cruise market (the largest in the world) and the lion's share in Europe too.

It argues that the regulators should regard cruises as part of the wider travel sector where its share would be small, but it's hard to see that cutting much ice.

Another problem might come in Europe where the Royal Caribbean-P&O deal would not come under EU jurisdiction because the European sales of the pair come below the 250m euros a year threshold. Given that Europe has been the graveyard for mega-mergers in the past year or so, this could be crucial.

Shareholders might be tempted to vote down the Royal Caribbean deal in the hope of getting their hands on Carnival's cash. A similar dilemma faced First Choice shareholders when confronted with bids from Kuoni and Airtours. In the end, both bids failed and First Choice was left high and dry. P&O Princess might be best advised to postpone its EGM on its Royal Caribbean deal until after the regulatory process on both deals has played its course and let shareholders decide at the end of the marathon rather than the beginning.

Rough luck

Legal & General's retiring director of investments, David Rough, is best known as that rare commodity, a fund manager with the balls to attack directors for pursing silly strategies and awarding themselves stupendous pay-offs. But unless there is a spectacular turnaround in the markets in the next two weeks, he will not be best remembered for his forecasting acumen.

A year ago, he and his team at L&G were predicting that the FTSE 100 would be 7,250 in 12 months time. Just for the record, they reckoned inflation would end the year at 2.2 per cent, while base rates would be a hefty 5.75 per cent. One pound would buy you some $1.55 in December 2001, they declared. Today the Footsie is 30 per cent short of Mr Rough's prediction, inflation has dropped to a record low of 1.8 per cent, base rates are at a 38-year-low of 4.0 per cent and a pound buys measly $1.46.

Mr Rough was full of remorse yesterday, but that wasn't going to stop him predicting a healthy 20 per cent recovery in the UK stock market over the next 12 months. He needn't have been so contrite, of course: the City's investment banks were also singing from his hymn sheet last December, predicting the FTSE would close this year even higher.

Where did everyone go wrong? The universal error among fund managers strategists last year was to believe that the bursting of the dot.com bubble would be short-lived, with recovery coming by the end of the first quarter of this year. Yet the fallout continues today. Industry remains flush with stock, lay-offs are accelerating, whole companies are collapsing and economists are talking about deflation.

Mr Rough is sticking his neck out by arguing that the recovery we expected last year is now just around the corner, with UK bluechips set to be among the world's best performing stocks. Let's hope he's right. Unfortunately, he will be long gone from L&G before we find out if he is.

m.harrison@independent.co.uk

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