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OCTOBER 18, 2004
An Oil Giant For Players With Patience Shell, an unusually complex company, may actually be one of those special situations made for individual investors How long will Wall Street keep Royal Dutch/Shell Group (RD ) in the doghouse? After laying out new plans for growth in recent transatlantic meetings with institutional investors, the energy giant failed to win parole. Two days of talk only left its shares 6% lower. Given the gravity of its transgression -- overstating its estimate of proven reserves by nearly 24%, for which last summer it agreed to pay U.S. and British regulators $150 million in fines -- Royal Dutch/Shell can count on doing much more than the five months facing Martha Stewart. Consider that time your opportunity. Royal Dutch/Shell -- an unusually complex company with two different stocks and headquartered in both the Netherlands and Britain -- strikes me as one of those special situations made for individual investors. More than Wall Street pros, with their focus on quarterly results, individuals can afford to be patient as a sturdy company rehabilitates itself. Near $52 (Royal Dutch) and $45 a share (Shell Transport & Trading (SC )), the stocks have badly lagged peers and now trade at a discount to them. With the world thirsting for oil and natural gas, chances are good that this gap will narrow.  EVEN IN TODAY'S CRISIS of confidence, Royal Dutch/Shell remains in the top tier of supremely profitable oil titans, with BP (BP ) and ExxonMobil (XOM ). While it has already tightened its process for estimating reserves, further corporate governance reforms are due to be announced in November. In the first half the company saw revenue climb 17%, to $157 billion, with operating profit jumping 25%, to $15.8 billion. The gains came despite a 4% slide in output, to 3.8 million barrels of oil-equivalent a day. It expects daily output will sink as low as 3.5 million bbl. next year and in 2006, a worrisome trend. Just the same, Charles Ober of the T. Rowe Price New Era Fund (PRNEX ) sees potential for "a decent spurt in earnings that would surprise the Street." Ober, whose fund is up an annual average of 18% in the last three years and has big stakes in Royal Dutch along with its rivals, told me some 30% of the company's capital is tied up in work that's yielding little or no current return. Profits from some of these projects -- liquified natural gas at Russia's Sakhalin Island, Canada's Athabasca tar sands, or the Bonga deepwater field off Nigeria, for example -- are a good bet to flow noticeably two years from now. So far the Bonga project has not been disrupted by Nigeria's political strife. Meantime, Royal Dutch/Shell is paying relatively rich dividends. How rich may be obscured because comparing foreign-source payouts is tricky. Netherlands-based Royal Dutch withholds for taxes up to 25% of its dividends. So a taxable U.S. investor would not have seen the $2.11 that Royal Dutch paid in two distributions this year, but $1.59. (U.S. investors can claim a deduction or credit for those taxes). Shell, however, is based in Britain. There, a new tax treaty with the U.S. ended such withholding. It doesn't help that some popular databases report foreign dividends before taxes, some after taxes, still others after varying rates of taxes. To get past the confusion, Standard & Poor's (MHP ) energy analyst Tina Vital suggests looking at dividends before withholding. Drill down, and you will find such a comparison is favorable to Royal Dutch/Shell. Exxon Mobil is yielding 2.1% and BP 2.9%. Royal Dutch/Shell expects to raise its dividends at least in step with inflation. If so, then Shell in the coming year should yield 3.9% and Royal Dutch 4.2% or so. Next to the 2.6% on a two-year Treasury note, it's not a bad way to do time in Wall Street's pokey.  By Robert Barker
BW MALL
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