Royal Dutch/Shell strategy sets investments of $12 billion/year

By the OGJ Online Staff

LONDON, Dec. 17 -- Royal Dutch/Shell Group has set a strategy to maintain profits at 15%/year, invest $12 billion/year, cut costs by $500 million/year, and sell $7 billion of under performing assets if necessary.

The company said its exploration and production division would provide the main thrust of its activities with substantial developments in Nigeria and China. It indicated that it is in a position to take advantage of the present downturn in the industry to make acquisitions.

Phillip Watts, Chairman of Shell's committee of managing directors, told London financial analysts that the group is well positioned to deliver good returns even in a continuing recession as a result of its strong balance sheet, balanced set of businesses, and low cost structure. This will allow continued disciplined investment throughout the business cycle.

He said that all targets set in 1998, including $5 billion cost improvements and 14% return on average capital employed (ROACE) are expected to be exceeded in 2001.

Reference conditions, the baseline for tracking performance, remain conservative. The main changes are lower marketing margins reflecting continual competitive pressure, and higher Brent oil prices, premised at $16/bbl.

Established businesses will be capable of delivering 15% ROACE at reference conditions. For the next 2 years, E&P is expected to deliver around 18%.

The presentation will be repeated in New York tomorrow, when it is likely that Watts will be asked to expand on the possibility of Shell making acquisitions in the coming year, following its purchasing of marketing assets in the US this year.

Watts said, "We are looking for acquisitions which add real value and have a real strategic fit. We have cash, but it isn't burning a hole in our pockets."

He also said that priority is being given to returning some $7 billion of assets with unsatisfactory returns to acceptable profitability. "If a route to satisfactory performance cannot be found, portfolio action will be taken."

Capital investment plans for the next 2 years remain $12 billion/year. In the longer term, growth in capital employed of some 5%/year is expected, with the highest growth in E&P and gas and power. Upstream volume growth averaging 3%/year until 2005 is expected, while contracted sales volumes of LNG are projected to grow at 6%/year.

This is effectively a lowering of the Shell oil output target. A year ago a 5% target was being discussed within Shell and BP PLC has set a target of at least 5.5%. This coupled with a lower than expected cost-cutting projection has left most analysts making no change in their own estimates of Shell profitability.

Watts said that the strong balance sheet and cash generating capacity ensure a continuing capability to deliver 50% higher cash to shareholders on average in 2001-05 compared to 2000. So far, the share buyback program, which began at the start of 2001, has returned $4 billion to shareholders.

"Over the past 3 years the group's delivery against its targets has been outstanding. The group's robust profitability will enable it to perform well going forward in the uncertain business environment. The organization's competitive edge, from its technology, brand, reach, and reputation, will enable it to continue growing earnings by capturing and developing profitable investments. The balance between returns and growth has been chosen to maximize shareholder value from the strong portfolio, as well as from the talents and capabilities of staff."

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