Shell's profits warning wipes pounds 1.8bn off shares

SHARES IN Shell lost more than 5 per cent of their value yesterday, wiping pounds 1.8bn off the company's market capitalisation as the stock market came to terms with the oil giant's shock profits warning.

Investors in Shell Transport and Trading, the UK arm of the Anglo-Dutch oil group, saw the shares close 18.75p lower at 336p, having hit 322.5p at one point, as analysts prepared to cut their current year forecasts. Over 86 million shares were traded.

The bombshell was delivered by Shell chairman Mark Moody-Stuart who was in San Francisco speaking to fund managers. He said the overall business environment in the second half of 1998 would be significantly worse than the first half and the overall trading climate was the toughest in the past five years.

Announcing the closure of four European head offices in London, Paris, Hamburg and Rotterdam, with the loss of up to 4,200 jobs, Mr Moody-Stuart blamed the re-structure on the collapse in oil prices and the economic crisis in the Far East.

He said the Brent oil price, which has averaged around $18 per barrel over the past 10 years, was likely to stay depressed over the next two years at around $12 to $16 per barrel. He said the low oil price would mean that Shell would stay "well below" its projections, only made in May, of a return on capital of 12 to 12.5 per cent.

Fergus MacLeod, oil analyst at BT Alex.Brown, said: "They have told us nothing new about the operating environment. What is new is the change to Shell's approach in improving performance. From a shareholder viewpoint that is welcome."

In the City, the most controversial element of yesterday's statement was the company's admission that "in the light of the more depressed outlook" Shell is looking to write down the value of some of its assets. Analysts said this would reduce Shell's depreciation charge, thereby increasing earnings.

"One would not expect a company of Shell's stature to engage in this kind of practice. It is demeaning for them," said John Toalster, oil analyst at SG Securities. "They insisted they would achieve their target on capital employed and now they are saying they won't. It is an acute corporate embarrassment."

Mr Moody-Stuart insisted that Shell's financial position remains strong and that its dividend policy is unchanged. He said: "This is a long term business. If we go back to the previous oil price collapse in 1986 you will find total shareholder return since then for shareholder in Royal Dutch Shell was 21 per cent per annum, a good 4 per cent above the Standard and Poors index."

Shell's difficulties have forced it into a major re-think. Earlier this month it announced plans for a merger of its European marketing and refining operations with those of Texaco. It has also announced an oil and gas swap with Occidental as well as a range of chemicals joint ventures and disposals.

Mr Toalster at SG Securities said: "We have probably seen the worst with Shell and this is a turning point."

Stephen O'Brien, chief executive of London First Centre, the capital's inward investment agency, commenting on the company's decision to close its Shell-Mex centre on the Strand, said the move was "highly regrettable". Nevertheless, he added, "this news must not detract from London's continuing success in attracting international investors".