Shell strives to shore up profits
Rivals and a low crude oil price have finally taken their toll, writes Reed Landberg
Sunday 13 December 1998
Shell is eager to revive flagging returns and bolster its position as smaller competitors such as Exxon and British Petroleum pursue multi- billion-dollar acquisitions to create companies that rival it in size. The presentations will be the most detailed to date on the strategy of its chairman Mark Moody-Stuart, who assumed the post on 1 July.
"They must do some ingenious restructuring to their business to get returns up,'' said David Stedman, an analyst with Daiwa Europe. "They're facing a terrible oil price, a slowing petrochemical cycle, and competitors are merging. These are significant problems.''
Analysts have all but dismissed the prospect that Shell will tie up with another major oil company, such as Chevron, Texaco or Conoco. It doesn't need further economies of scale - it's already bigger than BP/Amoco would be - and because it has avoided the kind of cost-cutting that US oil companies executed in the last decade, Shell still has plenty of places to trim. Shell executives said large mergers often get bogged down in regulatory reviews that can strip the transactions of their envisioned benefits and distract managers.
"Academic work shows that mergers rarely achieve all the benefits envisaged,'' vice chairman Maarten van den Bergh said in October.
Instead, Shell is focusing on its own house. Its profits fell 31 per cent in the first nine months of this year to $4.3bn as Brent crude fell below $10 a barrel, its lowest in 12 years and half last year's peak of almost $25. Mr Moody-Stuart is eager to deliver Shell's promise last year to make 15 per cent return on capital invested. The measure of the company's efficiency in making investments dipped to 9.2 per cent in the year to October, down from 12.1 per cent in 1997.
His plan has two prongs: slim the management team and sell businesses that won't be first or second in their markets. Mr Moody-Stuart also is eager to simplify Shell's reporting lines, which traditionally have run along regional and business-segment lines. In September he said headquarters in the UK, Netherlands, Germany and France would be closed to strip the country barons of power. "Executive decisions have to be made rapidly and business accountability must be clear,'' he said last week.
Analysts figure Shell could announce charges of between $2bn and $5bn to cover the cost of closing refineries, selling chemical plants and marking down the value of ageing oil fields. Mr Moody-Stuart said in October that the company was considering some write-downs but declined to discuss their magnitude.
"It's getting bloody inside the organisation,'' said Liz Butler, an analyst with WestLB Panmure in London. "Shell needs to take a $5bn charge, minimum.''
A write-down would reduce Shell's depreciation charges, bolstering both profit and returns on capital, and clear the way to sell some properties, such as its Sola refinery in Norway. It is soliciting partners for some chemical businesses, and lower oil prices leave it vulnerable to write- downs on ageing oil fields in the US and North Sea. Some analysts dismissed the prospect of a write-down as an accounting gimmick, though the method has won favour when done at rival oil companies.
BP began a 1992 restructuring with a pounds 1bn charge, selling refineries and its fertiliser business and scaling back oil exploration. Its return on capital employed rose to 17.4 per cent last year from 9.4 per cent in 1993. Copyright: IOS & Bloomberg
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