MARKET COMMENT
Shell Shock Value

By Maynard Paton (TMFMayn)
January 9, 2004

Blue chip investors should turn their attention Shell (LSE: SHEL). The oil giant today shocked the market when it admitted to incorrectly categorising four billion barrels of oil. The shares slumped 28.5p (7.1%) to 372.25p and now look good value.

Somewhat astonishingly, Shell's blunder involved 20% of its 'proven' reserves, which would now only appear to be 'probable'. However, the company confirmed the error had no material affect on past financial statements and did not change the oil/gas volumes ultimately expected to be recovered. In fact, Shell anticipates most of the affected reserves will be re-classified in the proven category over time as 'field developments mature'.

Of course, the re-jig prompts many questions about Shell's management. And though production levels will remain flat during 2004 and 2005, the re-evaluation could very well cause a production shortfall a few years down the line. At the end of 2002, proven reserves proper could sustain 13 years of production.

Balancing those worries though is the firm's reliable dividend stream. Shell's payout has risen every year over the past decade, compounding at a 7.7% average (during the same ten years, a fluctuating oil price has caused annual profits to fall on five occasions). Going on last year's payout, Shell's shares presently carry a 4.11% yield, notably higher than the average offered in recent years.

All in all, there's no getting away from the fact that oil is a good long-term industry bet and that Shell remains a major global player. Granted, Shell's 'safe haven' reputation has taken a knock, but backing cheap, solid blue chips when they stumble usually pays off.

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