Will Shell slide on slick acquisitions?

Two surprise multi-billion-pound international deals pulled off cleanly in less than 10 days – just the sort of behaviour you'd expect from a nimble, adventurous firebrand of a company.

Sadly, Royal Dutch Shell isn't fooling anyone.

Its double purchase of Pennzoil and Enterprise may have looked like a seized opportunity by an aggressive acquirer, but for a lot of observers in the City, it smacked of a cash-rich, lumbering company running short of ideas.

The problem for Shell is that its old rival BP really has had a dynamic few years. With Lord Browne at the helm, BP has lurched ambitiously from one mega-merger to another, but with the resultant group still looking pretty snappy. Under Phil Watts and his predecessor, Mark Moody-Stuart, Shell has had its work cut out to avoid being thought of as a branch of the civil service. It had told the market that it was on the acquisition trail, and some analysts feel Shell is now trying to prove something.

To give it its due, few have criticised the purchase of Pennzoil, except to point out that it did not exactly accord with Shell's stated aim of increasing its upstream assets. The Pennzoil-Quaker group is the largest seller of lubricants in the US, and it was an area where Shell needed to fill a gap: as part of its deal to buy Texaco's chain of petrol stations in America, Shell lost the rights to the popular Havoline brand of oils.

The £4.3bn deal for Enterprise takes a lot more explaining. Shell has bought a portfolio that gives it plenty of operations around the world, and will help achieve the higher production targets it has promised the market. For the real optimists, Enterprise even offers the possibility of a couple of surprise jewels in the crown: some exciting prospects in the Gulf of Mexico and a 17 per cent interest in the juicy Tahiti discovery made last Monday.

But analysts have two big criticisms. The first is that the combination of these purchases will dilute Shell's overall earnings. In a note entitled "Why Enterprise? Because it was there?", Merrill Lynch argues that there is "no compelling fit between the two companies," and that "with Enterprise, Pennzoil and $9bn later, it has seen its return on capital employed decline from 20 per cent to 18.5 per cent".

The Merrill analysts also attack Shell's reckoning of the cost savings. "Half of the £300m synergies relate to the ongoing reduc- tion in Enterprise Oil's exploration budget. We don't think that not drilling wells is a synergy."

But an even bigger criticism, raised by the whole market, is that Shell has massively overpaid for Enterprise. Because of the business it is in, Enterprise stock has moved closely with the global price of crude – an index that has soared 35 per cent since the start of this year. By any measure, Shell is buying a company whose shares are at the top of a bull-run.

Shell's double purchase is the sort of move that causes markets everywhere to examine where crude prices are heading, and unfortunately for Shell, the question is being asked at a phase of extreme volatility for oil markets. Opec appears to be back in the driving seat, and some have commented that the cartel has in effect won its price war with Russia without firing a shot.

In the past few weeks, political news from the Middle East has overtaken economic fundamentals and, as one trader put it, "markets are trading on froth and nerves". Violence in Israel and the prospect of US strikes on Iraq have pushed the price up, while the announcement of Colin Powell's visit to the region has calmed it down.

On Friday, Brent Crude stood at $26.39 – a figure that Ali Rodriguez, the secretary general of Opec, believes contains a "war premium" of $2 to $5 per barrel. Any prospect that the price would slide was obliterated by a Friday call from Iranian leader Ayatollah Khamenei that all Islamic oil-producers should suspend exports to the West.

High global oil prices and a diverse, non-Opec production portfolio would normally be excellent news for a company like Shell, but the City is finding the last fortnight's corporate action a little bewildering. What worries analysts is that perhaps good old conservative Shell was a better bet, particularly given the £5bn-odd it could still use for more purchases. As one put it: "These are not the ideal markets for a wealthy giant with an acquisitions complex."