USD 63.7606

-0.19

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+0.04

BRENT 58.94

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AI-92 42.28

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AI-95 46.04

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AI-98 51.75

0

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37

Royal Dutch/Shell

Why would an oil company raise its oil price assumptions when crude prices are falling? The answer is, to disguise plans to relax capital discipline in key areas. As its rivals have merged and grown since its last strategy review in 1998 Shell has (mostly organically) produced strong returns on average capital employed and $5bn in cost savings.

Why would an oil company raise its oil price assumptions when crude prices are falling? The answer is, to disguise plans to relax capital discipline in key areas. As its rivals have merged and grown since its last strategy review in 1998 Shell has (mostly organically) produced strong returns on average capital employed and $5bn in cost savings. It now claims its target of 13-15 per cent ROCE until 2005, based on $16 per barrel oil prices, represents little change to the previous goal.
But in exploration and production, returns are likely to fall after 2003. It is ramping up investment to about $7.5bn a year, which reflects some awkwardness about its modest 3 per cent a year hydrocarbon growth target. It is rattling its money box to show it has firepower for acquisitions of about $20bn - which would increase gearing only to about 25 per cent. The trouble is, like Shell, many potential targets have already cut costs which would limit merger benefits. And acquisitions will put further strain on its returns.
It plans to offset the looser E&P discipline with onerous demands on the oil products division, a serial underperformer especially in the US. Putting Equilon and Motiva - whose stakes were bought from Texaco - into Shell's competent downstream hands should raise margins. But that will not be enough to dispel doubts about Shell's long-term prospects - especially with so much cash piling up in its armoury, in danger of being mis-spent. While those concerns remain, it deserves its 10 per cent valuation discount to BP.

Source : Financial Times