Shell slips up on end of oil's run

Royal & Sun Alliance; Jarvis
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The Independent Online

Sir Mark Moody-Stuart departed from Shell at just the right moment. He delivered his last figures as chairman, for the first three months of this year, when the company delivered an astounding £3.86bn in post-tax earnings.

He left it to Phil Watts, his successor, to be the bearer of bad news. Sure, the company made silly money in the second quarter, some £3.6bn, in fact. Production levels were lower than expected but this was mostly due to operational problems in the North Sea. The oil price came in at a chunky $27.40 for the period.

Now the business cycle for the energy sector appears to have peaked. Not only was the second quarter less impressive than Sir Mark's valedictory performance, it came with an almighty clanger. Mr Watts said that, given the rapidly deteriorating world economic picture, Shell would have to re-examine its stated aim of growing production by 5 per cent between 2000 and 2005.

He thoroughly annoyed the market by declining to put a new number on the target. Analysts were reaching for their spreadsheets, but they were given no guidance as it how much to cut their forecasts by. For a company of Shell's scale and output levels, shaving say 2 per cent off the target would have enormous significance.

Shell has to face the analysts again in September, when it must provide some answers.

Profits at an oil company are pretty much a function of the oil price, and its shares reflect that. Three years ago, oil stood at just $10 a barrel and Shell shares languished at 304.5p. Since then, oil has had a remarkably strong run and oil groups have raked in the cash. Shell shares yesterday closed down 25p at 575p, having dropped from a high of 637.5p seen earlier in the year.

The company has been through a major cost-cutting exercise and, with nearly $10bn lying in the bank, it is well-placed to ride out the global economic downturn. It is a defensive stock but everything points to a less attractive time ahead, when global economic weakness could put serious downward pressure on the oil price. Take profits.

Royal & Sun Alliance

Royal & Sun Alliance, the general insurance group headed by Bob Mendelsohn, has been engaged in a heroic struggle to improve its cost effectiveness. It has fought to bring the total administrative expenses and insurance pay-outs down to 103 per cent of the premiums it receives. Yesterday, it said it got there in the second quarter.

But the champagne remains on ice. Although RSA has squeezed out unprofitable insurance writing by selling off loss making businesses, such as those in Spain and Italy, its divestment programme is running behind schedule, with the company blaming market conditions. It means a target of 103 per cent for the full-year could still be blown off course if it needs to pay out for hurricane damage in the second half.

Meanwhile, over at CGNU, its bigger rival has set a 102 per cent costs target.

There is also the unresolved issue of RSA's remaining life insurance and pensions business in the UK, which it has sidelined in the drive to focus on car, health, home and pet insurance. Analysts had hoped for a clear signal on favoured options for the life division, which RSA might sell, but Mr Mendelsohn would say only that he is considering all the options, including some sort of securitisation instead of a sale.

Operating profit for the half-year to June rose 17 per cent to £375m, while the core general insurance business jumped 58 per cent to account for £344m.

RSA has been lucky. The collapse of Independent Insurance, whose local council customers it bought from the receiver, plus a couple of high-profile failures in Australia, have reduced capacity in the industry. Premiums for car and home insurance are rising at double-digit percentages as battle-scarred insurers observe an unspoken truce in their seven-year price war.

The group's shares were up 11.75p to 495.75p yesterday, putting them on 1.4 times the enterprise value of the group. RSA is still a work in progress, and the stock is unlikely to be free to enjoy the advantages of rising premiums until the future of the life business is resolved.


More good news from Jarvis, which maintains train tracks, schools and buildings for the private sector in its widespread and spreading outsourcing work. It has won another £75m schools upkeep contract, in Brighton & Hove, and is on track to meet market expectations for the full-year.

With light at the end of the tunnel in the battle over public-private partnership on London Underground, where Jarvis is a preferred bidder, the shares are likely to resume their upward march. Up 10.5p to 470.25p yesterday, and on 19 times forecast 2001 earnings, the stock is still a buy.