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MARKET COMMENT
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Colchester, Essex -- Few companies are more blue chip than Shell (LSE: SHEL), but equally few have rivalled it for conservatism. But there has been a change in the last few years, albeit glacial, and today's update from the company indicates that it is keen to build on that base. It is setting itself some rigorous targets that ought to speed up the process of changing from a lumbering giant to a more focused business. The fact almost all its rivals have already done this is proof of its necessity. Shell has had a very lazy balance sheet; good for letting investors sleep at night, but not so good for driving the business. Under its new plan Shell aims to keep gearing at 20% to 30%, calculated by debt to debt plus equity. It will do that by increasing returns to shareholders by 50%, for the next five years from the base year of 2000. That means more dividends and share buy-backs. It will also be achieved by raising capital expenditure from $10b to $12b a year. A pretty impressive demonstration of how powerful this company is. However, management by inputs doesn't help shareholders. It is outputs that matter, and the company says it will be a disciplined rise. Let's hope so. The good news is that planning will be based on an oil price of $14/bbl. That should stop projects of marginal value getting finance and it needs to ensure that capital goes to the right places. So far this year it says it has achieved a 15% Return on Average Capital Employed (ROAC) in its main businesses. Maybe the new plan is working. To back up its assertions that it is improving Shell says it is it delivering 5% annual average increases in hydrocarbon production and 90% of the $4b cost cutting targeted for 2001 has already been achieved. Encouragingly, it now says it has raised the target to $5b. The story sounds good, but will the market believe it? Go to our discussion boards to see what Fools think. Where Next? Shell discussion board | Oil and Gas sector discussion board
