Investment column: Shell

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LIKE TI GROUP, Shell Trading & Transport, the London-listed share of oil major Royal/Dutch Shell, is enjoying recovery. But its directors, as usual, refuse to be optimistic about the prospects for their industry. Even as the oil price hovered around $20 a barrel, and Shell posted second- quarter net income up 30 per cent, chairman Mark Moody-Stuart was saying that market conditions were really not good and refining margins were still coming under pressure.

Shell has chosen to handle the crisis in the industry that followed the collapse of the oil price at the end of 1997 by cost-cutting and restructuring. BP, by contrast, chose to merge with Amoco. As the oil price has picked up and funds have re-weighted their portfolios, BP Amoco has soared. Shell, meanwhile, has struggled to convince investors its restructuring story has credibility.

Doubts about that story should be quashed now. The restructuring of the "downstream" (petrol forecourt) operations has resulted in plentiful cash generation to offset the difficulties in refining. Cost savings totalled $450m in the first half; Shell is absolutely confident of achieving $2.5bn savings by 2001.

Dresdner Kleinwort Benson expects full-year net income of pounds 7bn and earnings of 17.6p per share. That puts Shell shares, up 15p at 508.5p yesterday, on a forward p/e of 27 times, which seems expensive given that BP Amoco's rating is 33 times. The interim figures lend further justification to Shell's claim it does not need a merger to emerge from the crisis a winner. The shares remain a buy.