From: Lynn J. Cook, Houston Chronicle
Published October 29, 2004 12:00 AM

Royal Dutch-Shell to Become One

Oct. 29—Royal Dutch-Shell Group of Companies — an oil giant with a corporate governance structure as complicated as its name — is trying to simplify.


That was the good news Thursday, but the embattled company also warned it may have to write down its oil reserve estimates for a fourth time this year, with Shell Group Chief Executive Jeroen van der Veer estimating another 900 million barrels could evaporate from reserve rosters.


The two major announcements came Thursday as Shell published its third-quarter financial results. Thanks to high oil prices Shell's earnings rose 70 percent to $5.4 billion. The company logged revenues of $71 billion, a 44 percent jump over this time last year.


Van der Veer told analysts, "This is the end of 60-40," referring to the group's infamous ownership structure where Royal Dutch Petroleum, based in The Hague, owns 60 percent of the company and Shell Transport & Trading Co., based in London, owns 40 percent.


Under the proposed merger, Royal Dutch and Shell Transport would combine into one company with one set of executives and one board of directors led by one non-executive chairman. It will report to a single board in The Hague.


Van der Veer, who would head the combined company as chief executive officer, said merging the two companies is imperative to become more efficient and resolve the reserve crisis.


Fadel Gheit of Oppenheimer & Co. said Shell's management has seen the daylight but isn't out of the woods yet.


"It's positive. Their structure has been like an octopus with so many tentacles it can't move fast enough," he said. "They're still trickling down on shareholders bad news about reserve revisions."


If Gheit got his druthers, Shell would really change the management culture by poaching executive talent from Exxon Mobil and other competitors. He also wants to see Shell adopt a truly independent 15-member board of directors.


"I do not want to see any former executives on the board," Gheit said.


Both Royal Dutch and Shell Transport are publicly traded companies. After news of the merger hit the market, Royal Dutch shares rose 28 cents to $54.11, while Shell Transport shares closed up 64 cents to $47.41 in New York.


Royal Dutch shareholders would receive two shares in the newly merged company for every share they now hold. Shell Transport shareholders would be offered 0.2874 share for every share they now hold.


The proposed merger goes before shareholders in April. If the plan is approved, Van der Veer said management can be merged as early as May 2005.


"Now the art is, of course, to deliver that strategy, to deliver that performance and to do that with a sense of urgency," he said.


Analysts generally agreed merging the companies is a step in the right direction, but fretted about a new reserve write-down. Merrill Lynch upgraded Royal Dutch to buy from its hold position, but Friedman, Billings, Ramsey maintained its sell rating on the stock.


Friedman energy analyst Jacques Rousseau points out that Shell isn't expanding its production as quickly as Exxon Mobil or BP. The group's return on capital also lags its peers.


Rousseau wrote in a report on Thursday: "We believe that it will take a number of years before Royal Dutch can become competitive with other major integrated oils in terms of financial performance and shareholder returns."


Under the proposed merger, Royal Dutch-Shell would have five executives and 10 non-executives on the board, including Aad Jacobs serving as the non-executive chairman. But Jacobs and other supposedly independent directors have worked for Shell in the past.


VRichard Bennett with Lens Governance Advisors is a consultant on a shareholder lawsuit brought against Shell in June on behalf of two pension funds.


Bennett, too, thinks a merged company could clean up its act, but he worries about lingering board members who were around during the days of overstating oil reserves.


"These companies have had abysmal corporate governance," he said. "Are they going from that to just conventionally bad corporate governance? We think given the history of the group they need to go the additional step of giving shareholders the affirmative right to nominate three directors directly."


To see more of the Houston Chronicle, or to subscribe to the newspaper, go to http://www.HoustonChronicle.comĀ© 2004, Houston Chronicle. Distributed by Knight Ridder/Tribune Business News.


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