Must-do-better Shell is all at sea

The Investment Column
edited by Tom Stevenson

Expectations of another record quarter's income were cruelly dashed by disappointing interim figures from Shell yesterday and the 11p fall to a closing price of 911.5p was entirely justified. Chairman John Jennings's "must do better" gloss on the results was echoed in the City where attention focused on the oil and chemicals giant's woeful inability to meet even its internal performance targets.

On the face of it, a 15 per cent increase in net income was a presentable first-half result, but within that a sharp fall in second-quarter profits gave a worrying pointer to the future. What really drove the shares down was the pounds 100m fall in net income - 8 per cent - from pounds 1.28bn, to pounds 1.18bn. Earnings per share for Shell Transport, the UK side of the Anglo-Dutch empire, dropped from14p to 12.9p between April and June.

Again on the face of it, the worst part of the picture was the chemicals business, where profits fell a whopping 54 per cent. But in that, Shell was at least in good company yesterday with the former ICI joint venture EVC and Hanson both complaining about the dire trading conditions afflicting the industry. Chemicals is a highly cyclical business and, to an extent, out of the hands of individual company managements.

The real problem at Shell lies in the intensely competitive refining and marketing division, the downstream arm that among other things makes and sells the company's petrol. Though half-yearly income rose by 27 per cent to pounds 1bn, the business has consistently failed to match internal targets.

Last November Shell unveiled the "road map", an appropriate title for the corporate gospel of an oil company. It sets targets for return on capital and, as the restructuring continues, the road map has assumed supreme importance. It does not make happy reading.

For a start, Shell set a headline target of a 12 per cent total return for this year, compared with 10.4 per cent last year. The actual return in the four quarters to June 1996 was just 10.2 per cent. That would be bad enough were the target very demanding. The fact of the matter is that BP, the industry's top performer after a remarkable return to form since the departure of Bob Horton four years ago, manages to achieve an 18 per cent return.

Basically, Shell is below the industry average across the board. But the real crunch is in refining and marketing, where against a target of 15 per cent the current actual performance is a return of just 9 per cent. The company is aware of the problem and is doing something about it. It still has some of the highest quality assets in the business, but it is by no means clear that the company is changing fast enough.